Best Practices for ERC Accounting

The government established the employee retention credit, or ERC, as a mechanism to help businesses keep their staff members throughout the pandemic. It is recommended that you fully comprehend how to do ERC Accounting for the credit if you were able to receive it.

Disclosures and how to count the credit as revenue are part of this. Continue reading if you require more explanation on how to account for the employee retention credit. And what errors to avoid when doing so. We’ll go through all you need to know about accounting for the ERC. As well as who to go to if you want further details.

ERC Accounting Treatment Determination

You must choose the appropriate accounting approach after your business requests the credit and is granted it.

Based on the eligible wages you have incurred, both employee retention credits for 2020 and 2021 are entirely refundable against your business’s share of Social Security taxes.

How to Account for Employee Retention Credit Correctly

You must be aware of the applicable accounting standard. Especially if your company qualifies for the employee retention credit.

Most experts advise using “Accounting Standards Update Subtopic 958-605” when recording this income. Since the majority of businesses can only participate in the ERC if they meet the eligibility standards, the government views it as a conditional grant.

The Credits and Debits are Posted

Gross records should be kept for all donations and expenditures made to the ERC. Before receiving the employee retention credit, the whole amount will be added to your company’s tax liability.

The employee retention credit should be reported as a negative to accounts receivable. The refundable advance responsibility is credited and the cash is debited if your organization got the credit in the form of advance payments.

The Application of Your Accounting Standard

Make sure your company adheres to the disclosure and presentation requirements of the accounting standard. For instance, because GAAP normally does not permit net presentation in financial statements, it is strongly advised not to net the income with the expenses incurred to generate the income.

You have the choice to net the ERC income against the expenses under IAS 20. Or to present it as “other income” under IAS 20.

In either case, the presentation must be evaluated to see if it’s deceptive. And the type and value of the credits your company earned must be adequately disclosed.

ASU 2021-10 Disclosure Requirements

Be careful to include the disclosures required by ASU 2021-10 in addition to information regarding the kind of credits you earned.

ASU 2021-10 changes mandate that companies list specific disclosures regarding their dealings with their governing body. Applying contribution or donation accounting models allows for the subsequent accounting of these disclosures.

Disclosure requirements:

  • Details on the motivation for these transactions
  • Related accounting policy
  • Important transactional terms and circumstances
  • Assurances and possibilities

There are experts you may contact for more advice if you’re unclear about how to present this information. You might get assistance from specific businesses, such as Your Part Time Accountant, with organizing this information.

Common ERC Errors and Misconceptions

When it comes to employee retention credit, the vast majority of employers have a few basic misconceptions. For instance, many businesses assumed that because they had previously requested money from the Paycheck Protection Program, they were ineligible for this credit (PPP).

Fortunately, qualified businesses were allowed to claim both. All thanks to the CAA (Consolidated Appropriations Act). Congress removed the limitations that indicated you may only choose one over the other under the statute.

My Company Didn’t Close Down

Another prevalent misunderstanding was that if your business did not shut down, you could not collect the credit. Businesses that were closed down, even partially, as a result of a governmental order (stated, local, or federal) may be eligible for the credit. For instance, if a government decree forced your company to cut back on hours, you might still be eligible for the credit.

Other instances of partial shutdowns that may be considered:

  • Hours cut to allow for thorough cleanings and sanitization
  • Closing certain commercial establishments but not others
  • Possessing a finite capacity
  • Interruptions in your supply chain or vendors

These are a few instances where your company can be eligible for the ERC. The major inquiry in the program was, “Did government-ordered complete or partial suspension of business operations prevent your business from continuing operations? And did this have a detrimental effect on your business operations?”

If you said “yes,” then you might still be eligible. Remember that other tests determine your eligibility as well. You must pass the gross receipt reduction exam in addition to this one.

Taking Into Account Employee Retention Credit

It could appear challenging to account for the employee retention credit. Especially if you don’t know which guidelines to follow.

Additionally, there are several frequent errors that your company should avoid when doing ERC accounting for this credit. Or making a backdated claim for it. Contact us if you require help correctly accounting for this credit. Or if you simply have inquiries about the employee retention credit in general!