Eric: How would you like to get a six-figure check in the mail from the IRS with no strings attached? Hmm, sounds a little leaky, right? Today, on Construction Genius, we're going to be talking about employee retention credits, and depending on the size of your business and how your construction company was impacted during the pandemic years of 2020 and 2021, you could be eligible for a credit that is up to a six-figure amount.
Today, on Construction Genius, my guest is Catherine Tindall. She is a CPA and partner at Dominion Enterprise Services, a specialty tax advisory practice. I'm excited to have Catherine here to share her insights on employee retention credit so that business owners in the construction industry can better understand how to take advantage of this generous credit program before it times out, and it will be timing out relatively soon. [00:59.5]
The good news about this interview is that I ask Catherine to give me the fifth-grade explanation for my benefit, because I'm not super sophisticated when it comes to these kinds of things, and so she clearly outlines what the employee retention credit is all about and begin to think through whether or not it's something that you can take advantage of.
We also have a very interesting conversation about what makes a good CPA and the biggest mistakes that CPAs make when working with construction companies. You'll not only get some insights into the employee retention credit, but also into what you should be looking for when you are working with the CPA.
Enjoy my conversation with Catherine. Feel free to share it with other people that you think would benefit from listening, and as always, thank you for listening to Construction Genius. [01:46.4]
This is Eric Anderton, and you're listening to “Construction Genius”, a leadership masterclass. Thomas Edison said that genius is one percent inspiration and 99 percent perspiration. If you're a construction leader, you know all about the perspiration, and this show is all about the one percent inspiration that you can add to your hard work to help you to improve your leadership.
Eric: Catherine, welcome to Construction Genius.
Catherine: Thank you, Eric. I'm glad to be here.
Eric: When it comes to technical things like taxes and all that kind of stuff, I just kind of give my information to the CPA, hope for the best, and get ready to write my check. But, today, we're going to be talking about employee retention credit or ERC. I'm playing the role of a fifth-grader right here. What is the employee retention credit?
Catherine: It's a one-time tax credit. It came out during the pandemic a couple years ago, but the nice thing about it is, because it's a tax credit, you have a couple years to go back and get it. Since there was a lot of confusion during the pandemic around eligibility because Congress changed the rules a couple times, a lot of people who are eligible for this credit didn't actually take it. [03:04.2]
I usually tell most business owners that it's almost like a third round of PPP funds. That's how beneficial it can be, because the credit itself, it's up to $26,000 per employee. That's the max. Most people don't qualify for all of that, but if you can qualify for some of that, you can imagine even with a head count of 10 to 15 employees, you can be looking at the six-figure range, just depending on what was going on in your company, so it's one of those kind of hidden gems of the tax code. You might have heard people advertising for services like this, but it's one of those things where I encourage business owners to check it out because it can be a really valuable credit for your business.
Eric: Okay, so let's talk about it. Who's eligible for this credit?
Catherine: Sure, eligibility. The first piece is you have to be an employer. You have to have W-2 employees. Your wages, family wages usually do not count towards the credit, so it's really a credit for your employees, and how you're eligible for it is there's basically a two-factor test. [04:00.8]
The first way you can be eligible is if you’ve had certain revenue declines on a quarterly basis in 2019 comparative to 2020 and 2021, and I usually tell people, instead of trying to figure out the figures and figure out the numbers, just have a tax pro run that for you and give them quarterly financial statements, and they'll be able to tell you immediately whether or not you qualify under that. That's one way you can qualify as a company, and so that opens it up potentially to any employer because it's just a revenue test.
The second way that you can be eligible, and this is also a quarterly analysis, is if you had government orders that were interfering with your operations, and I'm purposefully keeping that kind of vague because it's the same thing, where instead of you trying to diagnose yourself, you really want to work with a tax professional who understands the rules, and then also can get a deep insight onto what was going on in your company during the pandemic, because there are any number of things that can qualify you. [04:56.1]
It really comes down to the nature of the government orders you were subject to and the nature of how it impacted your operations, which is kind of a threading the needle thing. But it's a quarterly eligibility test, so you can have some quarters that are eligible under the revenues. You can have some quarters that are eligible under government orders. It's a mix and match thing, and so that's why it can be a little complicated figuring out how much you're eligible for, but, in general, that's the basics of the program.
Eric: Okay, let me ask you this because construction was deemed in many areas an essential service, and so folks kept going even throughout that pandemic. Are there some subtleties to the government orders? Can you give us some examples of some of those subtleties of the government orders affecting me?
Catherine: For a lot of construction, they were deemed essential, and so the test that we have is not inessential versus non-essential, or where you completely shut down. We have to be able to demonstrate the way that you were forced to change your operations due to direct government orders was representing more than a nominal effect in your business. The best way is an example. [05:58.4]
For instance, a paving company in Washington was mandated by government orders not to be allowed to do services for residential customers for the first three months of the pandemic. That would be a qualifying event because we can show the government order that the government was saying, “You can't do business with residential clients. You can only do business with essential businesses,” so that's a restriction on their operations. For them, where residential represents more than a nominal part of their business, it's probably half of their business, that meets that standard as well, and so they would qualify just based on that government order.
Another example of something that I see that qualifies a lot of the time, you have a construction crew where they do a lot of residential work, say, in apartment units or something like that as part of a property management company, something like that. They were forced under government restrictions to have to do social distancing requirements that reduced the crew sizes that they could have on site. Instead of being able to run a crew of, say, 10 people to do a remodel of an interior, they could only have six people. [06:58.0]
That represents more than a nominal effect, and, say, it's more detailed than that, but you can kind of see where it can come in, where it's like, Okay, we had to comply with government orders, and it did change how we had to operate in a way that's not just people having to put masks on or people having to wash their hands or sanitize where it reduced our ability to earn revenue—and that's really what the test is and that's what you're looking for, and that's something where I'm giving you kind of a vague answer, but it's a much more quantitative answer than that when you actually work with somebody for it, because it comes down to a certain “How much does this revenue represent as part of your whole portfolio? How many man hours were affected here?”
Then we have certain bright-line tests that are kind of complicated to explain, where you can say, Okay, this is a black and white situation, you either meet that test or you don't. It's not one of those things where you say, Oh, well, I felt like I was disrupted, therefore, I'm eligible. There's a lot of research and a lot of documentation that goes behind it. But those are some examples of where it can come in.
Eric: You gave that example of residential. If I was a commercial contractor, and because of the social distancing and I was doing, let's say, a building, I could only have a six-person crew as opposed to a 10-person crew, the same thing might apply. [08:08.8]
Catherine: Yeah, because it all comes down to two pieces there. The first piece is you have to be able to show the government order, so you have to be able to show that you were legally forced to comply with mandates that were reducing what you could do. That's the first piece. You’ve got to find that government order.
Then the second piece of it is just showing that the effect that government order had was more than a nominal effect in your business, and that “more than nominal” term actually is a loaded word. It has a lot of meaning behind it. So, I usually tell people, if you feel like you were impacted by government orders, what you should do is talk to a tax professional who will actually go back, find the order, see what the stipulations were, talk to you about “Okay, how does this actually map onto your operations, and do we meet the tests?” because it's not a gray-area thing. It's either you meet the test or you don't meet the test, and the IRS has given us quantitative ways to show that. [09:01.7]
Eric: Okay. Now, you said that you could get up to $26,000 per person. Did I hear that correctly? Per employee?
Catherine: Yeah, and one thing I should say, too, there is that how the credit works itself, it's not like it's a credit towards future payroll taxes. It comes back as a check in the mail. Say you have a head count of 10. You end up qualifying for a hodgepodge of quarters. It ends up being say $100,000. How it actually comes back is it'll be checks in the mail from the IRS for 100,000, and because it's a refund of money that you've already paid, you can use it for whatever you want in the business.
It's like when you get a refund on your income tax returns and then that refund is just in the business, you can do what you want with it. This program works the same way, so you're not limited with how you use that cash other than what you would normally be limited to with an income tax refund. But that's the mechanism of how it works. For most businesses I talk to, they're like, Oh, great, I'm going to use this and buy a bunch of equipment, or I'm going to replenish my retirement account that I wasn't contributing to, or they have all sorts of things that they're going to use it for and that's the beauty of this program because you really can put it where the cash is needed. [10:07.4]
Eric: Okay, that's an important distinction, too, if I'm hearing you right from the PPP, because with the PPP, I got the money, but then I have to report later on and justify it, and all this. You're saying this is just cash. It's part of the-- They're just viewing it almost as a refund on the taxes you've already paid. Am I hearing that correctly?
Catherine: Yeah, that's right. It's different from the PPP that way insofar as you're not restricted for how you use the funds. The other piece I think that's a critical thing that a lot of business owners don't understand, unlike the PPP where it was a fairly simple calculation and the SBA either approves it or denies it, the way that a tax credit work is that it really relies on the credentials of that professional you're working with.
Especially for this credit program, there's a lot of bad actors in this space who aren't tax professionals trying to do this work, just because it can end up being a really big credit, but you're really relying on that tax professional to do the calculation correctly, and so when they submit the paperwork to the IRS, the IRS will tend to just rubber-stamp process everything. You can get a check back, but then get a notice from the IRS a couple years later about an audit of it, so you have to be really careful with that. [11:09.6]
It's not as simple as PPP where you can try to DIY it or just “Okay, if the IRS isn't going to approve it, they just won't pay us.” That's not how it works. It's like when you file a bad tax return, the IRS is going to assume that it's right until they come back with enforcement, and what we've seen in the past couple months, the IRS just got a huge enforcement budget increase and this program, in particular, is going to be a sitting-duck target, just from what I'm seeing, because there's a lot of non-tax professionals trying to capitalize on this opportunity.
Eric: Very interesting. Okay, so tell me, you said there's the $26,000 max per year. Just want to make sure I heard that right.
Catherine: That's for the whole program, so it's for years 2020 and 2021. The total of the program can be 26,000, yeah.
Eric: That's, again, the amount that you get per employees is based upon a variety of different factors, so just don't get that 26,000 stuck in your head, but know that it's up to 26,000. [12:04.5]
Catherine: Yeah, and I'd say, more realistically, it really comes down to your particular circumstances of your company, because construction crew operating in Florida versus California, that's a really different situation and so it's hard for me to say, okay, on average people get this much, because it's so dependent on your situation. But what I do tell people is even if you got $10,000 per employee, you need to look into it.
It's like having a bad mole on your arm. It's like this may or may not be a problem, but I need to just go to the dermatologist and get this checked out. It's the same thing with this tax credit. It's potentially so high that you need to have a professional analysis done. I usually tell people, if you have more than five employees, you need to talk to somebody about it, because you know the upswing, depending on what was going on, it can easily turn into a six-figure opportunity.
Eric: What's the deadline for claiming this employee retention program?
Catherine: It's going to start to phase out this coming April. It's going to fully phase out the April after that. [13:00.5]
Eric: Then we're talking April 2023?
Catherine: Yes.
Eric: Okay, and then it'll be fully phased out by 2024.
Catherine: It'll start to phase out ’23 to ’24, and then ’24 to ’25 is when it fully comes out.
Eric: Okay, but the years that we're talking about are ’20 to ’21.
Catherine: Yes.
Eric: During the pandemic.
Catherine: Yep.
Eric: Okay, excellent, excellent. What else do you need to say about how the employee retention credit is calculated? Anything that we haven't covered so far?
Catherine: I don't think for the business owner, there's really much you need to know about the calculation. I think the key decision point for a business owner, and especially in construction, because you guys are usually a more technically-complicated case when it comes down to the government orders, is knowing the right kind of person to work with for these.
So, the first piece that I'd recommend you look for is you need to work with people that are licensed tax professionals. You need to work with people that didn't just form the company right when this program started. You need to look for companies where they have a pedigree in tax and that the person that you're talking to on the phone is not a salesperson. You're talking to a tax professional. There's a lot of nuance in the questions that we ask and what we look for for how we document everything. [14:10.4]
I think a lot of people get swayed by “Oh, they do a lot of refunds.” I'm seeing some really big actors in this space that have filed hundreds of millions of dollars of claims that I know are bad, because I'm starting to do resolution work from them. Really, you’ve got to watch out for the fancy marketing. You’ve got to watch out for client testimonials, because people haven't been audited yet. It's going to take a couple years before people get audited, so somebody being happy and being a happy customer does not indicate that it was actually a good job because those people haven't been audited yet. You’ve got to really watch out for the quality of the professional that you're working with.
The other piece, too, that is a big warning that I have for most business owners is, if you haven't had conversations with your CPA about-- they have access to your quarterly financial statements. If they haven't talked to you and had this specific conversation around “What was going on during the pandemic with your operations? Did you have a government order impacting it? What was going on? How have your operations changed?” if they haven't had that kind of a conversation with you in depth, then you haven't been assessed for the credit, because it's really those two things. [15:12.7]
A lot of people think, Oh, my CPA looked into it. If you haven't had those two things happen that you can remember distinctly, your CPA didn't look into it. I can just tell you that because it's a serious conversation about that government situation, especially in construction. That's something where you don't want them to say, Oh, okay, it sounds like you don't qualify. It's like, All right, can you do some research? It's like, this is potentially a lot of money, you want to really look into it. Those are the two big pitfalls that I see for most business owners with it.
Eric: As you're talking here, Catherine, in my business, which is obviously way different than a construction business, I’ve gone through a few CPAs in my time. Construction is extremely complicated in terms of accounting. There's a lot of moving balls, all that kind of stuff. If I'm not satisfied with my CPA, and we're talking specifically in construction, what are some things I should be looking for in terms of really getting comfortable with the fact that this person knows what they're talking about? [16:07.1]
They have obviously my best interests in mind, but they're also able to do that second step. They're not just passively waiting for me to give them the documents and process stuff, but they're being more proactive. Can you tell me about that a little bit?
Catherine: Yeah, I would say, the first thing that I tell people, if you're paying at top-bracket, especially in construction, if that's what you're paying in tax, you're really not getting the full benefit of what a tax professional can do. In my practice, part of our practice is the tax credit work, but then the other side of my practice is strategic income tax planning. That's something kind of where I keep a small group of people on purpose.
But what I usually tell business owners is, if you're not getting proactive tax planning work done, you're really not getting the benefit of what a tax professional can actually do, and I think for most tax professionals, there's still, like you said, in such a reactive mindset of waiting for you to initiate conversations and waiting for you to say, “Hey, I heard this thing about cost segregations. What's that?” They're waiting for you to do that. [17:12.4]
If that's the kind of relationship you're in, just realize you're probably wasting a lot of money on taxes, because if they're not pursuing opportunities for you, and then also educating you around, okay, because you're in construction, you can qualify for special tax statuses, and if we're cognizant of what those are, and also me, as the tax professional, understanding your goals and how you want to build your wealth, are you going to start doing things like investing in properties at the same time that you're running your construction operation or what are your goals? What are you doing? How can we make that tax-aligned so that we're not having tax waste?
If you're not having conversations like that, I'd say, look for another tax professional or just have a conversation with your tax professional and say, “Hey, I want more. I don't just want my tax returns filed. I need strategic planning.” But for the most part, if they don't lead with that, it's going to be harder for you to turn the relationship into that, if it's not already there. [18:04.2]
I'd recommend, if you're interested in having a more proactive relationship, there's a couple of societies that I belong to, like the American Institute of Certified Tax Planners, and I would check them out. They have a directory and there's people that specialize in it. But, honestly, if you go online and you start googling this stuff, you'll find people who are active in this space, doing things like podcasts, doing things like accounting construction, tax planning, and you'll find these people putting out good resources, putting out materials, talking about strategies. Those are the people that you want to talk to, because they're already thinking about “How do I save money for the business owners?” and that's the way I want the relationship structured.
Eric: Let me just ask you this about strategic income tax planning. Tell me exactly, in very simple terms, what do you mean by that?
Catherine: What I mean by that is, with strategic income tax planning, it's a very different relationship than just filing tax returns. What I do with my clients is we have quarterly meetings. The first meeting that we have before I even take them on as a client is about an hour-long phone conversation around” [19:04.3]
“What do you do for work? What's your family life like?”
“What are your goals? What do you want out of life? Where are you trying to drive to? Where are you going?”
“What kind of person are you? What kind of relationship are you looking for here? Who are you?”
“How has your company been performing? How is it going to be performing?”
“How long are you going to be in your company? Are you going to exit? Are you going to sell? Are you going to pass it on to a family member? What's going on there?”
Getting a sense of the whole picture of who that person is, because even things like “How many kids do you have? And are you married or not?” all that fits into your tax life, and so we have that conversation. Then, from there, I craft a tax plan of saying, “Okay, this is what you're doing right now. This is how it flows through your tax return. This is how much you're paying. If we changed your entity, if we changed some things around your investment properties, if we changed your level of participation in the business, if we changed ownership structures of things, here's how much taxes you would save. This is how much more efficient it would go through the funnel. Here's the plan. Here are the things we need to implement.” [20:01.8]
Then we do implementation, so if it's hiring the kids, changing your retirement plans, changing your entity, we change all of that, and then it's a maintenance after that, say, okay, every quarter we check in. We make sure that you're all caught up on your estimated payments, but just making sure that, okay, if there's any opportunities for you, like credit programs you can do or things are, all of a sudden, not as efficient as they were, or, okay, you should invest in some more properties before the end of the year to add to your portfolio so we can kick off some more depreciation. Things like that.
It can be any number of things, but that's the kind of relationship, where instead of your tax person just handing you returns at the end of the year, it's like, okay, we need to change, usually change your behavior in slightly different ways to get you to be going through the tax funnel more efficiently.
Eric: Okay, let me ask you this. What is the biggest mistake that CPAs typically make when handling their clients' tax returns? If you can speak specifically to construction, that'd be great, but, in general, what's the biggest mistake you've seen in your experience? [21:01.1]
Catherine: Honestly, I'd say the biggest mistake that I see CPAs make, it goes back to that question that we just had, which is the tax professional has all the knowledge of how to change the situation, but because they've framed the relationship in a reactive, passive way, you have no ability to use that ability to actually move the needle for that business.
I see that happen a lot, where in other firms that I had worked in, in the past, people say, “Oh, this client is an idiot because they did this, this and this,” and it's like, they don't know. Why don't you do like quarterly meetings and tell them this is why we have to do this this way, because you're either going to kick off IRS notices or it is just going to waste a lot of money, or whatever it is.
But it's like, I think for a lot of CPAs, they don't see themselves as “No, I'm in the passenger seat to this business owner and I need to help them with their decision making. Not just being compliant with the IRS, but I need to be part of some of their decisions around what they do.” That's a big mistake that I see a lot of CPAs make. It's a big mistake that I see a lot of business owners make of not realizing, if I'm losing 30% of my income every year to taxes, I'm working a third of the year for the government, basically. [22:09.2]
Eric: Yeah, right.
Catherine: I need to have a pretty serious relationship with the person that manages that, because that represents a huge amount of my efforts that are just mailed off to the IRS.
Eric: Let's just [do] a quick summary here, Catherine. Just give me the quick summary of the employee retention credit, how it's calculated. When is the deadline? How do I go about getting the ball rolling with that?
Catherine: Sure, quick summary, employee retention credit. If you have more than five employees, you need to get assessed for it. It can potentially be a six-figure cashback opportunity for your business. It's a one-time thing from the pandemic, so just pull the Band-Aid off, get it checked out. It's going to start expiring this coming April.
I usually tell people, if you're sitting on $100,000 of cash back, the deadline was yesterday, right? You kind of want to get that back, especially when, for most business owners, it maybe takes an hour or two, the whole process, when you work with a good provider. For an hour or two of your time, to generate a six-figure ROI on that, that's pretty good. There's not very many opportunities in your business that are going to be like that. [23:03.8]
That's the basics of the program. You want to get yourself checked out by a licensed tax professional or a specialty CPA firm. For instance, my CPA firm, we're a specialty firm. I do these for other CPAs who don't want to do them, because it's such a complex-- It gets complex really quickly, especially in construction where it's such a nuanced eligibility. You really want to work with somebody that does a lot of this work.
If your CPA doesn't do a lot of these credits, you'll want to work with somebody that does a lot of them, because the documentation is really tough. The audit risk is going to be fairly [higher]. Especially for construction, I think the audit risk is much higher for you guys, just based on what I see. But it's a great program and I don't think people should be skittish about doing it, because like PPP, it can make a really big difference in your company, for sure, if you can qualify for it.
Eric: Excellent. Catherine, tell us about how we can get in touch with you, please.
Catherine: Sure. I'm assuming that my website will be in the show notes, but you can visit us at DominionES.com. I have more resources on the website. We have a PDF guide that's “Top five mistakes when it comes to ERC”, so you can learn more about pitfalls and how you make the decision of who to work with, and just common misconceptions about the program itself. [24:10.6]
But I would just recommend, if you're interested and you feel like you had or your company had some difficulties during the pandemic, just reach out and we can do-- How we start our process is just doing a quick phone call to see if it seems like you are eligible for it and figure out what it is.
Eric: And you guys are located out on the, what, East Coast?
Catherine: We're a fully remote firm, so we've got people all over the country.
Eric: Oh, nice, nice, so you can work with folks all over the country then?
Catherine: Yep, all over the place.
Eric: Excellent. All right, Catherine, I have one quick question for you, forgive me for this. Where do you actually live?
Catherine: I live part of the year in California, part of the year in New Hampshire.
Eric: Okay, so New Hampshire. Where in New Hampshire do you live?
Catherine: I'm up north, so I'm in the Lakes Region.
Eric: Okay, so if I'm up in your region, what is the one restaurant I need to hit, if I'm ever visiting the New Hampshire area?
Catherine: I think if you're visiting the New Hampshire area and you want to get that New England feel, there's a restaurant called the Common Man. There's a couple of them around and they're actually kind of easy to get to, but it kind of has that old New England feel to it, so I'd say, the Common Man. [25:08.8]
Eric: Excellent. We'll put a link in the show notes also to the Common Man and we'll have the links in the show notes to your website as well. Catherine, I appreciate you joining us, being very clear in your explanation. Like I said, I need the fifth-grade explanation. You gave it to me.
Catherine: That’s good.
Eric: I feel confident. Thank you very much.
Catherine: Great. Thank you so much, Eric. Really enjoyed it.
Eric: Awesome.
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Eric: Hey, this is Eric. Just before you bounce away, thank you for listening to Construction Genius. Please give the show a rating and review wherever you get your podcasts.
Check out the show notes. In there, you will be able to find links to how you can get in touch with Catherine, if you'd like to further discuss how you could take advantage of the employee retention credit.
Thank you for listening to Construction Genius today. [25:49.0]
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