Does the ERTC Affect Business Valuation?

November 9, 2023
Dayes Law Firm

The Employee Retention Tax Credit (ERTC) allows eligible employers to claim benefits on employee wages during the COVID-19 pandemic. Understanding how this program affects your business moving forward can help you make the right financial decisions. So, how does the ERTC business valuation process work after receiving funds? 

At Dayes Law Firm, we help businesses retroactively claim the ERTC for maximum benefits. Read on to learn how the ERTC can affect your business’s future accounting. Don’t hesitate to contact a tax professional from our team if you have further questions about the Employee Retention Tax Credit. 

Understanding the Employee Retention Tax Credit

The Employee Retention Tax Credit allows eligible businesses and organizations to claim benefits on wages paid between March 13, 2020, and December 31, 2021. To qualify, your business must have experienced a significant decline in gross receipts or a government-ordered partial or full shutdown during that period. If either of those scenarios occurred and you continued paying wages to your staff, you may qualify. 

The ERTC allows you to claim a percentage of the wages you paid to each employee per quarter of the periods you qualify for. To claim the funds, you must submit an amended tax return. 

The government will give your business the ERC if you qualify. You can use the credit for various purposes, like investments, debt settlements, etc. 

Accounting Your Business’s Employee Retention Tax Credit Funds

To learn how the ERTC business valuation process works after receiving funds, you must first understand how to account for the ERTC funds.   

Is the ERTC Subject to Income Tax?

The Employee Retention Tax Credit serves as a refund to payroll taxes, not income taxes. Because of this, the credit is not subject to income taxes (ASC Topic 740 Income Taxes). 

Does the ERTC Count as a Business Loan?

No, the Employee Retention Tax Credit is not structured as a loan but rather a refundable credit, unlike Paycheck Protection Program (PPP) loans. Even businesses receiving the ERTC as an advance credit do not need to consider the benefits as a loan. Because the ERTC is not a debt nor subject to income tax, many consider it to be a government grant when selecting accounting models.

How you account for the ERTC depends on whether you have a for-profit or not-for-profit entity. Seek support from an experienced ERTC attorney for further information. 

Reporting the ERTC and Understanding Its Effects on Business Valuation

Businesses may need to report the ERTC as gross, depending on their structure, which may increase the business’s valuation. In the statement of activities, businesses may need to reflect the transaction as gross, with the unrestricted operating revenues as contributions, grants, or other forms of income. A current receivable may need to be recorded for some of the ERTC. 

How you report the ERTC and how it affects your business’s valuation will depend on numerous factors, including your for-profit or not-for-profit structure. The ERTC may increase your business valuation, though you should consult an experienced attorney for clearer answers. 

Do You Need Professional Support?

At Dayes Law Firm, we offer free, no-obligation consultations so business owners like you can learn more about their options with the Employee Retention Tax Credit. Whether you need help claiming your credit or understanding how to account for the funds, our experienced team can help. 

If you’re wondering how the ERTC business valuation process works, contact Dayes Law Firm at (866) 257-1223 to schedule a free consultation with our experienced team.