We’re back with another informative article about the Employee Retention Credit (ERC). If you’ve been following our blog series, you know ERC Specialists are the tax experts when it comes to ERC. And our goal is to impart as much wisdom into this complicated process for small businesses as possible.
Today, we’re discussing how the ERC affects your business taxes, so let’s dive right in.
The ERC tax credits are refundable tax credits against employer-paid Social Security taxes, and they are based on eligible wages that a qualified employer has paid. The maximum credit available to you as a small business is based on which wages are qualified per employee. In order to account for this correctly, many areas of consideration are required.
Obtaining Professional Guidance
If your small business qualifies for the ERC tax credits, you should consider which of the accounting standards should govern the acceptance of the benefits. Ensure you look to the Financial Accounting Standards Board to provide the appropriate guidance as to how to appropriately record the income. Considered a conditional grant, any small business or organization may qualify for the receipt of ERC funding if you are eligible per the IRS guidelines. ERC Specialists, DOES NOT provide any legal or accounting advice and users of this web site should consult with their own lawyer and C.P.A. for legal and accounting advice when it comes to business taxes.
Qualification & Timeframe to Receive ERC Tax Benefits
As we begin our assessment of the tax implication for ERC for small business, there are basically three ways to qualify for ERC funds. This includes 1) a significant decline in gross receipts over the same quarter(s) in 2019, or 2) a supply chain disruption that impacted your business’ ability to obtain critical goods or 3) a partial or full suspension of service delivery due to governmental restrictions related to the COVID-19 pandemic.
Of course, the time your business takes to realize this qualification may depend on which qualifying event your business chooses. For example, your business’ ability to qualify for the funding due to revenue reduction should be assessed based on each quarter, as eligibility depends on the quarter over quarter gross receipts comparison vs 2019.
For your business taxes, you should recognize a funding receivable for the amount not received, even if the forms haven’t yet been filed. In order to accurately account for the revenue and the receivable alike, you must determine if you qualify, and then calculate the credit. In an ideal world, you would also be filing the appropriate forms before you record that funding receivable as well.
If you choose to use the suspension of service delivery instead, the ERC funding is earned as wages are paid in the period in which you suspended services. For your business taxes, the contribution and related funding received should be recorded as the wages are accrued.
Accounting for ERC in Your Business Taxes
The IRS has clearly advised that ERC funding must be a reduction from your expenses, which then increases your taxable income, regardless of your business’s accounting method (e.g. cash vs accrual). Per IRS guidelines, you should amend your business’s tax return in order to reduce the expenses for the ERC funding amount you claim. Before embarking on refiling your tax returns, you should spend some time reviewing the IRS’s guidance issued on Aug. 4, 2021, via IRS Notice 2021-49. Here the IRS addresses the wages question and advises the ERC funding amount will indeed reduce the eligible deductions for qualified wages: They will be taxable in the associated year.
Because of this and so many various complexities, we recommend you seek the advice of a tax professional. Don’t go it alone and risk your business’s compliance. When you file for your ERC credit with ERC Specialists, our payroll tax professionals will provide you with documentation on the credits received for each quarter. You’ll want to give these to your CPA or tax professional so they can help you navigate the ERC process while staying on the right side of the IRS.