Financial Management
Employee Retention Credit Processing Updates: Here’s What Construction Firms Need to Know
By PHILLIP ROSS, CPA, CGMA, PARTNER
Did you apply for the Employee Retention Credit over the last few years only to face daunting delays? ERCs were a refundable tax credit introduced by the U.S. government to help businesses keep employees on their payroll during the COVID-19 pandemic, as part of the Coronavirus Aid, Relief, and Economic Security Act from March of 2020.
As the IRS implements extended processing times, increased scrutiny as well as revised guidelines for ERCs, many construction firms are waiting longer to receive their refunds, that can affect cash flow.
In the shadow of the COVID- 19 pandemic, ERCs did provide several benefits for construction firms, helping them to maintain financial stability and recover from the negative economic impact. They often provided support for cash flow—enabling firms to leverage a refundable tax credit against certain employment taxes and allowing construction firms to receive tax refunds. This infusion of cash could have helped firms maintain employment, cover operating expenses, pay down debt and ease other operational issues.
As with the name, ERCs also offered financial incentives for retaining employees, which meant construction firms were able to keep their skilled workforce as close to pre-pandemic levels as possible during periods of reduced business activity. While also requiring specific parameters to qualify, the ERC was available to firms for the second, third and fourth quarters in 2020, and the first, second and third quarters in 2021. Construction firms were able to retroactively claim the ERC for previous quarters by amending their payroll tax returns, even if they did not take the ERC on the timely filed payroll tax return, offering an opportunity to recoup funds they may have missed initially.
However, as we’re now seeing, changes to the IRS’ review of ERCs present current challenges to construction firms. Enhanced scrutiny presents heightened focus on fraud prevention and can bog down processing time for legitimate claims—and delayed refunds can have a negative impact on construction firms’ cash flow, especially for small to mid-sized companies.
This additional scrutiny means an extra burden for well-meaning firms, and they must now be ready for a potential IRS audit as to whether they qualified for ERC as well as if the amounts claimed stand up to scrutiny, The related documentation must be maintained in the event this happens.
According to IRS analysis, “between 60% and 70% of the [ERC] claims show an unacceptable level of risk.” It’s also important to note that firms may be subject to penalties and interest for any claims that are denied for refunds that were paid, and now have to be paid back. While the ERC may have been a valuable tool for construction firms to navigate the financial challenges of the COVID-19 pandemic, the evolving landscape of IRS scrutiny and extended processing times present new hurdles.
Firms must remain vigilant in maintaining thorough documentation and preparing for possible audits to ensure their claims meet current guidelines. We advise that you work with your CPA to ensure your company is compliant.
For more information, go to www.irs.gov/newsroom/irsenters-next-stage-of-employeeretention-credit-work-reviewindicates-vast-majority-showrisk-of-being-improper
About the author: Phillip Ross, CPA, CGMA is an Accounting and Audit Partner and Chair of the Construction Industry Group at Anchin, Block & Anchin, LLP. For more construction industry thought leadership and content, log on to www.anchin.com.