Millions of business owners suffered heavy losses throughout the pandemic, and many had to lay off employees or close their doors for good. If your business experienced hardship because of a government order requiring temporary closure or limiting commerce travel or group meetings due to COVID-19, you may qualify for the Employee Retention Tax Credit (ERTC).
As part of the American Rescue Plan, the ERTC credits you for qualified wages paid per employee per quarter in 2020 and 2021. Here’s what you need to know about ERTC compliance and reporting for your accounting books.
Follow GAAP Accounting Principles
As a business owner, you’re probably familiar with Generally Accepted Accounting Principles (GAAP). Issued by the Financial Accounting Standards Board (FASB), GAAP is a set of principles that allows you to track your assets, expenses, and liabilities.
These accounting principles:
- Allow your business to stay compliant with IRS rules and guidelines
- Provide a basis on which investors can make decisions
- Enable your business to take full advantage of the ERTC program
GAAP doesn’t give businesses specific instructions for ERTC compliance and reporting. However, these principles can give you a better idea of how to report the ERTC in your books.
Know Your ERTC Accounting Options
The ERTC is a payroll tax credit, not an income credit, so you won’t report it as an income credit in your accounting. Plus, it’s a refundable credit, not a loan.
If you’ve never accounted for a payroll credit before, you may be a bit confused about how to document it in your books. You have two main accounting options for the ERTC: IAS 20 and ASC Subtopic 958-605.
IAS 20 as an Accounting Topic
If you’re a for-profit company, you can use IAS 20 to report the ERTC. Nonprofit organizations can’t use the IAS 20 method.
If you opt for IAS 20, you’ll account for the ERTC as a grant related to income. Instead of recognizing the grant upon receipt, you’d account for it for the benefit period (March 12 to December 31 for 2020) or quarterly (2021).
ASC Subtopic 958-605 for Nonprofit and For Profit Organizations
If your organization is a nonprofit, you would use Subtopic 958-605 to account for the ERTC. For-profit companies can use this method as well.
Under Subtopic 958-605, you must meet these ERTC eligibility conditions to recognize the grant into income:
- You experienced significant declines in gross receipts
- Your business partially or fully shut down due to a government order
With this accounting method, you’d present the credit as either an unearned refund advance or refund receivable. If you mark it as an advance, you should record it as a liability until you’ve met the conditions to earn the credit.
Once you’ve met the conditions, how you record the credit depends on whether you’re a for-profit or nonprofit organization. For-profit companies can record the credit as grant revenue or other income, while nonprofits can only record it as revenue.
Accounting for PPP Loan Recipients
Did your business take a Paycheck Protection Program (PPP) loan? Originally, businesses couldn’t take a PPP loan and qualify for the ERTC, but the IRS has since lifted that restriction.
If your business took a PPP loan, use the same accounting method you used for the loan to report your ERTC.
Contact Us for ERTC Accounting Assistance
ERTC compliance and reporting can be confusing if you’re unfamiliar with accounting principles. Not sure how to account for the ERTC in your records? Reach out to Dayes Law Firm for help today. We can also show you how to file an amended tax return if you haven’t claimed your credit yet.
For a free consultation with a tax professional at Dayes Law Firm, call us at (800) 503-2000.