The COVID-19 pandemic has resulted in staff disruptions for organizations across all industries. This crisis is being answered by legislation providing businesses a refundable credit they can apply against qualified wages and certain health insurance costs.
The Employee Retention Credit (ERC) – introduced in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act – has subsequently received an extension to cover 2021 disruptions as well.
This blog will illustrate how CPAs, accountants, and professional service firms can best utilize the Employee Retention Credit for all their clients’ business needs.
How the impact of the ERC has changed over time
Organizations utilizing the Employee Retention Credit upon its launch in March 2020 experienced either a full or partial suspension of operations due to the coronavirus pandemic. Throughout 2020, employers qualified if their gross receipts for a calendar quarter were below 50% of gross receipts for the same calendar quarter in 2019. To utilize the ERC in 2021, enterprises must have at least a 20% drop in gross receipts in a quarter compared to the same quarter in 2019.
The ERC received a modification earlier this year with the American Rescue Plan (ARP) Act, which expanded the credit to 70% of qualified wages through every quarter of 2021. Instead of comparing gross receipts to a corresponding quarter in 2019, qualifying entities can utilize receipts from an immediately preceding calendar quarter.
Even as the 2021 calendar comes to a close, ERCs will continue to impact financial statements for numerous organizations. The recent changes made to the ERC should make many more entities eligible for credit throughout the rest of the year.
How can my business apply for the Employee Retention Credit?
Eligible businesses can claim the ERC with their quarterly Form 941 filings due July 31, Oct. 31, and Dec. 31, 2021. Interested organizations should take the following steps:
- Quickly determine if company employees meet ERC criteria
- Visit the IRS ERC website
- Locate all payroll data for the last few years
- Direct any questions about eligibility to an experienced business solutions provider
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Consider these Employee Retention Credit accounting challenges
Accounting for funds received through the ERC will be an ongoing challenge even as offices reopen. Due to the unprecedented nature of the pandemic and subsequent CARES Act program changes, generally accepted accounting principles (GAAP) do not provide most businesses with specific accounting advice for government grants. Therefore, accountants must rely on accounting guidance by analogy. As the ERC is operated through payroll taxes rather than income taxes, the credit is not subject to ASC Topic 740 Income Taxes.
Unlike Paycheck Protection Program (PPP) Loans, the ERC is structured as a refundable credit, not a loan, even in cases in which entities are receiving an advance on credit. Since the ERC is neither income tax nor debt, most enterprises would consider it a form of government grant when establishing the appropriate accounting model.
Accounting options depend on a company’s organizational status:
- For-profit entities should account for the ERC as a government grant, by analogy to either ASC Subtopic 958-605 or International Accounting Standards 20 (IAS 20).
- U.S. GAAP specifies that not-for-profit (NFP) entities account for any government grant under Subtopic 958-605.
Using these standards, contributions are “recognized when the condition or conditions on which they depend are substantially met” (ASC 958-605-25). The conditions for the ERC include, but are not limited to:
- An organization adversely affected by the COVID-19 pandemic
- An entity that incurred payroll costs to retain employees
Changes to the Employee Retention Credit you should know about
Several pieces of legislation have expanded the scope and applicability of the ERC. For instance, the Consolidated Appropriations Act passed in December 2020 enabled employers to harness the ERC for expenses not covered by PPP loan proceeds.
Organizations that received a PPP loan while retroactively claiming the ERC for qualifying expenses must assess if the refund is a recognized subsequent event. Considerations include whether refund criteria are met as of the calendar year’s end.
Nor should entities forget disclosures: Regardless of the method in which the ERC is accounted for, financial statements must include disclosures about the applied accounting method, as well as relevant line items and amounts recognized in the financial statement.
For more information about the ERC, including accounting considerations, contact McGowanPro today.