What Are the ERTC Recordkeeping Requirements?

January 3, 2024
Dayes Law Firm

The ERTC is a refundable tax credit that your business can use to pay debts, hire more employees, purchase equipment, or meet any other needs that you may have. If you are seeking this credit, you may want to know how to meet IRS ERTC recordkeeping requirements.

Employee Retention Credit tracking and accounting are confusing because the ERTC is a refund of payroll taxes, not a loan from the government. The Accounting Standards Codification has plenty of guidance for income taxes, but lacks guidance for payroll tax refunds.

That said, there are two generally accepted ways to handle recordkeeping compliance for the ERTC: Subtopic 958-605 and IAS 20.

Recordkeeping Via Subtopic 958-605

For the majority of businesses, as well as nonprofits, Subtopic 958-605: Contributions Received and Contributions Made is the preferred ERTC recordkeeping method. This method treats ERTC credits as conditional contributions.

To use this method, you must have “substantially met” the eligibility conditions to record revenue, and you cannot record any amounts until you have evaluated and met these conditions.

You must meet one of two conditions to use this method:

  • Your business partially or fully closed down due to a government order limiting commerce, travel, or group meetings
  • You had at least a 50% drop in gross receipts compared to the same calendar quarter of the prior year (2020) or at least a 20% drop (2021)

If you’ve met one of these criteria, you should recognize a receivable for the portion of the credit that you have not yet received, even if you haven’t filed Form 941-X yet. However, it is ideal to have at least filed the form before recording the receivable.

If you qualify for advance ERTC credits, record any payments received prior to overcoming barriers of eligibility as a refundable advance until you have “substantially met” the eligibility conditions.

Recordkeeping Via IAS 20

IAS 20 is an alternative ERTC recordkeeping model that you may want to consider. This employee retention documentation model is only applicable to for-profit businesses and should not be used by nonprofits.

With IAS 20, you do not recognize ERTC credits until you have met the “reasonable assurance” threshold and received the credit. The “reasonable assurance” threshold is easier to meet than the “substantially met” threshold for Subtopic 958-605.

IAS 20 allows you to either count the credit against related payroll expenses or record the gross amount as “other income.” For each quarter that you meet the “reasonable assurance” threshold, you will record a receivable and choose a net expense or “other income.”

Where Should Your Business Report the ERTC?

You can report the ERTC in one of two ways on your financial statements:

  • Statement of Financial Position: With this option, you’ll record a current receivable for the ERTC amount that you did not take as a credit on your payroll tax reporting forms.
  • Statement of Activities: If you choose this option, you must record the transaction as gross and list it as a grant, contribution, or other income.

How Can You Claim the ERTC?

If your business has not yet claimed the ERTC, you can still do so retroactively. Complete Form 941-X: Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund and submit it to the IRS for processing (you’ll need to complete a separate form for each quarter you want to correct).

Call Dayes Law Firm for More Accounting Guidance

ERTC recordkeeping requirements are quite complicated, and it can be difficult to know which accounting method your business should use. If you need help selecting the right ERTC documentation model or want to know if you qualify for the credit, call Dayes Law Firm at (800) 503-2000 to request a free consultation. Learn more about tax credit records for the ERTC today.