Tips for Reporting the ERC Credit for Your Business

July 25, 2023
Dayes Law Firm

If your business closed down or suffered revenue losses during the COVID-19 pandemic, the Employee Retention Credit (ERC) could bring you much-needed relief. Once the IRS has sent you your refundable tax credit, you might still have questions about how to record it in your accounting books.

Is it important to report the ERC credit for businesses on your financial statements? You may need those records if the IRS comes after you in an audit of your employment tax returns. Your tax consultant might also want to check out your statements to ensure everything is correctly documented.

How To Account for the ERC on Your Financial Statements

When you sit down with your financial statements, you may have no idea where and how to report the ERC. There may be no universally accepted standards for reporting the ERC credit for businesses, but you can choose from one of three options that follow Generally Accepted Accounting Principles (GAAP).

International Accounting Standards (IAS) 20

If you used IAS 20 to account for your Paycheck Protection Program (PPP) loan, you should also use it to report your ERC. With this option, you’ll record the ERC for the same periods in which you’re using it to offset expenses.

To report the ERC this way, you’ll need to have “reasonable assurance” the IRS will give you the credit. To qualify, you need to fund your payroll costs and meet the ERC eligibility requirements.

When using IAS 20, you can either net the ERC against related payroll expenses or list it as a separate credit.

ACS 450, Contingencies

If you use ACS 450, you’ll record the ERC credit as a gain possibility by listing it as a separate account on your income statement. You will also defer income recognition statements until the income is realized or realizable. That means the IRS gave you the credit or you’re certain it will give it to you (a letter approving you for the ERC can serve as proof).

Record the ERC as a debit on the other side of your entry to lower your payroll tax liability.

The American Institute of Certified Public Accountants (AICPA) doesn’t recommend this method because it’s less precise than other accounting options.

ACS 958, Revenue Recognition

The ACS 958 option is a good choice for non- and for-profit entities. If you opt for the ACS 958 accounting method, you can only recognize the ERC in your books once you’ve substantially met its conditions. 

To meet these conditions, you’ll need to pay eligible payroll costs and report whichever of the following applies to you:

  • You’re an eligible employer who had to close your business (either partially or fully) in 2020 or 2021 in response to government orders.
  • In 2021, your business saw at least a 20% decline in gross receipts compared to the same quarter in 2019. If you claimed the credit for 2020, you’ll need to show at least a 50% reduction in gross receipts.

You can record the ERC as grant revenue or taxable income if you’re a for-profit business. You can only record your credit as revenue if you run a non-profit. Neither non- nor for-profit businesses can net the ERC against qualifying costs.

Call Us To Learn More About Accounting for the ERC

Reporting the ERC credit for businesses can feel intimidating if you’re not a financial pro. Reach out to Dayes Law Firm PC at (866) 257-1223 for a free consultation on ERC reporting today. We’ll review your tax situation, including qualified wages paid to employees, and help you pick the right accounting option for your business.