Does Capital Gains Influence the Employee Retention Credit?

August 11, 2023
Dayes Law Firm

Wondering how to claim the Employee Retention Credit (ERC)? This credit can be lifesaving if you’re an eligible business owner who kept workers on your payroll during the pandemic. 

The amount of the ERC varies depending on how many employees the business paid and how much the employees were paid. If a business meets a few requirements, it could be eligible for ERC credits worth thousands.

Business owners may wonder if capital gains influences eligibility for the credit. 

What Is the ERC and How Much Is It Worth?

The U.S. government introduced the ERC (also called the Employee Retention Tax Credit, or ERTC) in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). The ERC is a refundable payroll tax credit for businesses that kept workers on payroll in 2020 and 2021.

If a business qualifies, it can claim $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021. 

Does Your Business Qualify for the ERC?

To qualify for the ERC, a business must meet one of two requirements:

  • A business was forced to temporarily close doors because of a government order
  • A business experienced a significant decline in gross receipts

Many businesses find it easier to meet the gross receipts test. If a business qualifies this way, the business’s gross receipts must have dropped by:

  • More than 50% in 2020 compared to the same calendar quarter
  • More than 20% in 2020 compared to the same quarter

Sales count towards the total gross receipts. Capital gains earned from selling an investment count, too. For instance, if you sold one of your offices and made a profit on the sale, you’d need to factor that into your gross receipts.

In addition to ERC capital gains, gross receipts also include:

  • Dividends
  • Interest
  • Rents
  • Annuities and royalties

How to Claim the ERC

If you’ve been hunting for an ERC application but can’t find it, that’s because it doesn’t exist. To claim the credit, you’ll have to file an amended Form 941-X, Quarterly Federal Payroll Tax Return.

And you’ll need to do it soon, too. If you want the credit for 2020, you must file by April 15, 2024. If you’d like to claim the credit for 2021, the IRS gives you until April 15, 2025.

Gathering all the paperwork you’ll need can take a few weeks, so it’s smart to start the process sooner rather than later.

How to Report the ERC on Your Tax Return

The ERC doesn’t count as income, but the IRS says you need to report it on your taxes anyway. Exactly how you report it depends on whether you’re a partnership or a corporation.

Partners of partnerships must complete Form 1065. If you’re a shareholder of a corporation, you’ll fill out Form 1120-S.

Regardless of which form you complete, you’ll also need to include Schedule K-1.

To report the ERC on Form 1065, enter the amount you claimed in Box 15: Credits. Next, subtract that amount from your payroll expense deduction.

If you’re using Form 1120-S, you can report the ERC on line 13g: Other Credits. This is also where you’ll report:

  • Undistributed capital gains credits (in proportion to the gross income of shareholders)
  • Social Security and Medicare tax credits
  • Backup withholdings
  • Work Opportunity Tax Credit

Contact Dayes Law Firm if You Need Help With the ERC

At Dayes Law Firm, we can help you understand ERC capital gains and how they affect your eligibility. If you need help calculating the ERC or determining whether you’re eligible, call us at (800) 503-2000 today.