In 2020, the government introduced the Employee Retention Tax Credit (ERTC) through the CARES Act. In 2021, this credit expanded to include many more businesses. If you’re a business owner who claimed the ERTC, you know how much that boost helped you stay afloat. Even filing retroactively can help you recover from the aftermath of COVID-19.
However, many businesses are at a loss when it comes to ERTC financial reporting. This is still a new credit, so it isn’t clear how the IRS expects employers to account for it on their business statements.
At Dayes Law Firm, the ERTC team can help you navigate difficult tax issues.
What Is the ERTC?
The Employee Retention Tax Credit rewards employers for maintaining employees on their payroll during the financial crisis brought on by the COVID-19 pandemic. It refunds 50% of employee wages up to $10,000 for 2020 and 70% of employee wages up to $10,000 for the first three quarters of 2021.
To be eligible for the ERTC for 2020 wages, you must meet at least one of the following qualifications:
- 50% loss of gross revenue when comparing corresponding quarters to 2019’s revenue
- Partially or fully suspended operations in response to a government mandate
To be eligible for the ERTC for 2021 wages, you must have either:
- 20% loss of gross revenue compared to 2019
- Suspended operations while following a government order
Recording the ERTC on Financial Statements
You must report your ERTC benefits accurately on business statements, as tax authorities, corporations, and other entities frequently use them for investment and financing purposes.
You can report the ERTC through a Statement of Activities, which includes the revenue during a business’s reporting period. Nonprofits usually use this.
Your other option is to report using a Financial Position Statement. This is a balance sheet summarizing all of your financial information. In this case, you should report any ERC benefits you didn’t claim as a refund as current receivable and reasonable assurance.
Accounting for the ERTC
There are several accounting models you can use for ERTC financial reporting. Talking to a trusted tax attorney or financial advisor can help you make the right decision for you and your business.
Subtopic 958-605
Under this model, you will account for your ERTC benefits as conditional contributions. To qualify for the ERTC, you had to meet specific requirements. These are the conditions or barriers you had to overcome to earn the right of release as the promisor. You will account for each quarter you met these requirements and record the revenue and related accounts receivable.
IAS 20
If you’ve ever accounted for grant money or government aid, you may be familiar with the International Accounting Standards (IAS) 20. Under this model, you can account for the ERC as a separate credit on your income statement or net it against related payroll costs. If you decide to net it against your payroll costs, include a disclosure explaining this action.
ASC 450
Using the ASC 450 to account for the ERC follows the gain contingency model. This is the more restrictive approach to accounting for the ERC on financial statements, as you must resolve all uncertainties regarding your receipt of credit so the income from the ERC becomes recognizable. When you record tax credits using ASC 450, record it as a separate account on your income credit.
Need ERTC Guidance? Contact the Skilled Tax Attorneys at Dayes Law Firm
Are you still confused about ERTC financial reporting? Don’t worry; our team at Dayes Law Firm can help you claim the ERTC and understand how to report it. Contact us at 866-567-4510 today.