The Coronavirus Aid, Relief, and Economic Security Act, the first of many legislative initiatives enacted to combat the economic challenges brought about by COVID, introduced the Employee Retention Credit (ERC), which helped businesses retain their workforces and avoid layoffs during the pandemic. With each passing of a new coronavirus-related bill, the rules and guidance pertaining to the tax credit also changed.
The recent Infrastructure Investment and Jobs Act changed the rules for the ERC yet again. Under the new Act, the tax credit is only applicable to wages paid between March 12, 2020 and September 30, 2021 –three months earlier than originally stated. Fortunately, businesses still have up to three years to calculate tax credit eligibility during that period. A business may be eligible for the credit if they have experienced either:
- Full or partial suspension of operations due to government restrictions due to COVID-19
- Significant decline in cash receipts for a quarter in 2020, or 2021 (through September 30th) compared to the same quarter in 2019
Changes to the ERC in the Infrastructure Investment and Jobs Act also allow many businesses that received Paycheck Protection Program (PPP) loans to claim the ERC. Previously, both the Consolidated Appropriations Act and American Rescue Act of 2021 updated several facets of the ERC, such as increasing the tax credit limit to $7,000 per employee, per quarter. For a more comprehensive look at ERC provisions, please read New Legislation Bring Employee Retention Credit Updates.
I’ve Submitted a Return to Claim the Credit, Now What?
Due to IRS delays, organizations that have applied for the ERC have not yet received the refund. Absent additional guidance from the IRS, the refundable credit is generally reported as taxable income in the same period the qualified ERC wages are incurred.
Fortunately, not-for-profit organizations follow Financial Accounting Standards Board codification section 958-605 guidelines for revenue recognition related to conditional contributions. This requires recognition of revenue in the period that the conditions (or eligibility) are substantially met. Not-for-profit guidance also requires grant revenue to be generally recognized and presented separately from grant expenses rather than netting the credit against payroll expenses.
While there is less guidance for for-profit companies, under both generally accepted accounting principles, as well as comparable International models, a receivable is recorded once it becomes probable that the conditions have been met and collection is reasonably assured. Many businesses that clearly meet the eligibility requirements will then record a current receivable in the period that the credits are applied. Businesses will then have the choice to report the income as either a reduction to their payroll costs, as government assistance grant revenue, or below the line “other income”. Either method is generally acceptable, as long as the business owner discloses the election is made in the financial statements. Many prefer presenting any type of government assistance as “other income” as to not distort traditional payroll costs.
Annual Review of Payroll
Now is also the time to verify the accuracy of your employee payroll records before W-2s are issued. With many employers implementing remote work environments permanently, some employees have opted to relocate during the past couple years. With the high volume of changes to employee records, now is time to revisit controls in place to ensure all changes to payroll records are authorized and approved. You can learn more about these payroll controls by reading Predictable Payroll: Strategies to Help Avoid Trouble Before It Starts.
Each situation is unique so please be sure to consult with your accountant or financial advisor to discuss what is best for your particular situation.