Unraveling the Distinctions of the ERTC vs. R&D Tax Credits

September 20, 2023
Dayes Law Firm

Employers learning about the Employee Retention Tax Credit (ERTC or ERC) may benefit from knowing this refundable payroll tax credit may apply to tax years for which they already claimed the R&D Tax Credit. Introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, the ERTC allows eligible employers to file an amended tax return. So, what should you know about the ERTC versus the R&D Tax Credit?

Can Companies Claim Both the ERTC and R&D Tax Credits?

The ERTC and the R&D Tax Credit are payroll tax credits that companies can claim. The ERTC was part of the CARES Act, meant to help businesses stay open and continue paying employees through government-mandated shutdowns and losses in revenue.

The R&D Tax Credit has existed for decades, introduced with the Economic Recovery Tax Act (ERTA) of 1981. This tax credit applies to companies that dedicate a portion of their revenue to increasing research activities, including paying wages for employees working on R&D products and processes.

While companies can claim the ERTC and the R&D Tax Credit, they should be aware of IRS guidelines against double-dipping for the same wages. Ensure that you claim wages for employees engaged in “qualified research activities” under the R&D Tax Credit and qualified wages and health plan contributions for other employees under the ERTC.

Do Employers Need To Claim One Credit First?

The IRS released two relevant notices in 2021 describing the order for applying tax credits to applicable wages. The first was Notice 2021-23, which instructed business owners to apply the ERC to qualifying wages before applying the R&D credit to any remaining wages that qualified.

The second applicable statement from the IRS was Notice 2021-49, which instructed business owners to apply the R&D credit to eligible qualifying wages before applying the ERTC to any remaining qualifying wages or health plan contributions.

These notices describe the order in which businesses should claim each tax credit on their Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Notice 2021-49 applies only to the third and fourth quarters of 2021, requiring employers to claim the R&D credit before the ERTC for these quarters.

For 2020 and the first two quarters of 2021, employers should follow Notice 2021-23 and claim the ERTC before claiming the R&D Tax Credit. You should also look for and avoid overlapping with other tax credits or government programs, especially if you used a Paycheck Protection Program (PPP) loan to cover wages during the pandemic. If so, those wages are not eligible for the ERTC or the R&D Tax Credits.

When Should a Company Claim One Credit Instead of the Other?

When should you claim only one of these tax credits? There are some instances in which an eligible employer shouldn’t claim both credits, including:

  • When using one credit depletes the balance of qualified wages paid
  • When your company isn’t eligible for the ERTC according to specific terms in the CARES Act
  • When using both credits would lead to double-dipping for the same wages

To qualify for the ERTC, your company must meet certain criteria regarding government-mandated shutdowns, a decline in gross receipts, or qualification as a recovery startup business.

Contact Our Firm for More Information About Available Tax Credits for Your Business

Calculating qualified wages for these and other tax credits can be a complex process for many businesses. Call us today at Dayes Law Firm at (866) 567-4510 or contact us online to schedule a free consultation with an experienced business tax attorney.