The COVID-19 pandemic has caused financial hardship for many businesses, leading Congress to approve programs to provide financial assistance. One of these programs is the employee retention credit (ERC), which is a fully refundable tax credit that eligible employers can request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. The ERC is a misunderstood tax advantage for struggling employers, as owners of small and medium-sized businesses and managers of charities are unaware of it or are incorrect (or, more often, obsolete) in their knowledge.
This article provides background on the ERC and a practical guide for applying the two accounting models and the presentation and disclosure of financial statements. The ERC is available to employers who have experienced a full or partial suspension of operations due to a government order related to COVID-19, or who have experienced a significant decline in gross receipts. Small employers receive greater benefits under the ERC regime, as they can include wages paid to all employees for as long as they are an eligible employer. Large employers can only include salaries paid to employees for not providing services.
It is important to note that the ERC should not be registered until it is considered probable, which means that salaries are likely to qualify for the ERC and that the entity has met all the conditions for carrying out the ERC. To calculate the ERC, it is necessary to use the qualifying salaries that the company pays employees during the status of an eligible employer. However, you cannot claim the ERC with the same salaries that you used to qualify for PPP debt forgiveness. A for-profit organization would recognize the ERC as income from grants or other income if the requirements are met; the NFP entity is required to declare the ERC as income. Institutions should not net grants (ERC) with related costs in the financial statement, according to FASB ASC 958-605. One factor that complicates the accounting of ERC is the time to apply for and receive credit.
Companies can record receivables for credits that they are eligible for but have not yet received, or debts for credits received before related payroll costs are incurred. By applying IAS 20, for-profit entities do not recognize the ERC until the reasonable guarantee threshold related to the terms of the ERC and the receipt of credit is met. Employers cannot deduct the salaries used in the ERC assessment from taxable income up to the ERC amount during the calendar quarter. It now appears that, according to the most recent IRS guidelines, the employee retention credit should be recorded on Form 1120-S, line 13g, Annex K and Form 5884. Even if your company participates in the Paycheck Protection Program (PPP), you may qualify to receive the ERC. PPP loans can only finance eight to ten weeks of wage expenses, while ERC eligibility periods are longer. PPP loans can also finance non-wage expenses.
No, but, if possible, allocate the maximum allowable non-wage costs to the waiver of the PPP. If your company qualifies, you can apply for both FFCRA credit and ERC credit for your retirement plans. It is likely that sister holding companies can be treated as separate operations or businesses when considering an eligible employer status since their fund owned by holding companies is not an active operation or business (rather a passive investment vehicle).Our use of terms “our firm” and “we” and terms of similar meaning denote an alternative practice structure of Cherry Bekaert LLP and Cherry Bekaert Advisory LLC. Cherry Bekaert LLP is an independent certified public accounting firm that provides certification services to its clients, while Cherry Bekaert Advisory LLC and its subsidiaries provide tax and business advisory services to their clients. In conclusion, understanding how employee retention (tax credit) works is essential for businesses looking to take advantage of this program during these difficult times. By following this guide, businesses can ensure they are taking full advantage of this program while also adhering to all applicable laws and regulations.
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