The Employee Retention Credit (ERC) was created to encourage business owners to keep staff on the payroll while facing financial difficulties as a result of the COVID-19 pandemic. Businesses should learn how to report the Employee Retention Credit on a financial statement properly.
The ERC has an effect on financial statements, and it is unclear to businesses how that should be reported. The Financial Accounting Standards Board (FASB) has extensive instructions that describe how to report the Employee Retention Credit on financial statements.
Key ERC Credit Takeaways You Will Learn:
- Reporting ERC on Financial Statements: Understand the proper way to report Employee Retention Credit on financial statements.
- Financial Statement Presentation: Learn about the models for presenting Employee Retention Credit within financial statements.
- ERC Disclosure: Grasp the importance of disclosing Employee Retention Credit on financial statements and how to do so.
- Accounting Treatment: Discover the accounting treatment for Employee Retention Credit for both for-profit and not-for-profit entities.
- ERC Receivables: Learn how to handle Employee Retention Credit receivables on financial statements and maintain accuracy.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
How to Report Employee Retention Credit on Financial Statements?
Financial statements are written documents that describe a company’s operations and financial performance. Government authorities, accountants, corporations, and others frequently audit financial accounts to verify accuracy and for tax, financing, and investment purposes.
The absence of formal guidelines on how to reflect the ERC in financial statements has left many business owners and tax specialists in confusion. Some argue that the ERC should be declared as an uncertain tax situation, but this would raise doubt about the IRS’s receipt of the credits, triggering a mandatory disclosure.
Others have recommended reporting the ERC as an income tax position, however, the fact patterns do not meet the FASB guidance’s standards. So, it is necessary to understand how to report Employee Retention Credit on financial statements.
You can report ERC on Financial Statements in numerous ways. Following are some of the ways through which ERC can be reported on financial statements:
Statement of Activities:
The transaction should be recorded as a donation, grant, or other income in the unrestricted operating revenues.
Financial Position Statement:
The ERC amount that was not claimed as a refund on tax rate reporting forms should always be reported as a current receivable and reasonable assurance.
Further information about the ERC’s type for either sales or the A/R note is provided in this example:
Government program laws and regulations, such as the Employee Retention Credit created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, are complicated and open to interpretation. Claims being made under the CARES Legislation may be audited and reviewed retroactively. There is no guarantee that regulatory bodies will not question the Organization’s title to the ERC, but it is impossible to predict what influence (if any) this would have. Hopefully, these points will assist you in determining how to credit for the ERC in your business and how to represent the reward in your reporting. Read full restaurant erc details here.
Generally Accepted Accounting Principles (GAAP) do not give particular guidelines for reporting for ERCs, as we’ve seen with the Paycheck Protection Program (PPP) of the CARES Act. The ERC is comparable to a state grant, which is a topic that GAAP for a for-profit corporation does not touch.
As a consequence, a for-profit company will have to rely on alternative reporting standards. This “government grant” will be accounted for by a not-for-profit corporation per ASC 958-605. Based on whether the business is for-profit or otherwise, the accounting will change. According to Accounting Standards Codification ASC 958-605, this “government donation” will be reported by a not-for-profit business.
Check more details about How to Claim the Employee Retention Credit.
What Needs to Be Reported on Financial Statements About the Employee Retention Credit?
The next important query in line is to know what needs to be reported on financial statements about the ERC. For the ERC, there are three possible reporting treatments. Entities should account for ERC’s maximum credit according to one of these standards after determining which standard will give the maximum transparency to financial statement consumers.
Reporting for Government Grants:
- The majority of public corporations use this strategy to offset salaries with credit.
- In contrast to Paycheck Protection Program (PPP) loans, ERCs are organized as refundable credit rather than a loan.
- If an entity used IAS 20 to account for their PPP loans, it is assumed that they will use the same guidelines to report for their ERCs.
- A corporate entity realizes ERCs on a periodic basis over the period that it acknowledges payroll under IAS 20.
While there is a reasonable belief that the entity could very well conform to any terms and conditions to the government grants and that the grants will be received.
Receipt of Revenue
All non-profit organizations should utilize this strategy.
If ERCs are received as a cash advance, the entity will record a liability for the cash until the requirements to earn the credit are substantially completed.
When the following criteria are met:
- The money must be recorded as revenue by a not-for-profit organization.
- The grant cannot be used to offset qualified expenditures under Section 958-605.
Contingencies:
Companies would regard ERCs (either earned in money or as a credit against existing and future taxes) as gain possibilities under ASC 450.
Entities would not assess the likelihood of complying with the conditions of the ERC program under ASC 450-30, instead deferring any income statement recognition until all doubts are addressed and the income is “realized” or “realizable.”
In comparison to other approaches, The American Institute of Certified Public Accountants (AICPA) opposes this method since it provides less precision in reporting, assessment, and criteria.
Any ERC credit claimed will result in a decrease in wage expenditure reported to a level of the account balance. If an employer decides to report any 941 forms after filing their income tax return and profit entity for an eligible employee, the financial statements must also be revised to incorporate the credit.
The type of firm and financial statements will determine the optimal reporting approach. Because of the ERC’s intricacy in reporting and accounting, it’s crucial to get advice from a tax professional.
Learn more about 5 Ways to Determine Eligibility for the Employee Retention Credit.
Financial Statement Presentation of Employee Retention Credit
Financial Statement Presentation of Employee Retention Credit is one of the most important steps. Not-for-profit and for-profit entities using the ERC should adhere to the disclosure standards and present data in a consistent manner. Details of the ERC program and quantities, the accounting technique used, and where the amounts are included in the financial statements will all be covered in the presentation.
Entitlement holders who use the IAS 20 model must describe their accounting policy and financial statement presentation, as well as any contingencies relating to amounts recognized.
Generally Accepted Accounting Principles for Presenting Employee Retention Credit with Financial Statements
The Employee Retention Credit is not subject to any particular regulations under GAAP. Private entities, on the other hand, can implement the following three different models by analogy, based on recent PCC discussions:
- In International Accounting Standards (IAS) 20, Accounts for Grant Money or Disclosure of Government Aid, the government welfare model is described.
- Accounting Standards Codification (ASC) Subfield 958-605, Not-for-Profit Entities-Revenue Reporting, and the conditional grant as well as commitment model
- The ASC Subtopic 450-30, Gain Contingencies, contains the gain contingency model.
Three theories that may be used to account for PPP loans are comparable with all these three models. The answer to whether credit should be given gross as income or net of associated expenditures is dependent on the accounting model that a corporation has used by analogy.
If a firm follows IAS 20, it has the option of reporting the Employee Retention Credit as income or net of qualifying costs. The credit would most likely be reported as income in the other two models.
Check out Gross Receipts for Employee Retention Credit.
Employee Retention Credit ERC Financial Statement Disclosure
If the company anticipates satisfying the other requirements, a refundable advance relating to the ERC would be regarded as a current obligation. A for-profit organization would recognize the ERC as grant revenue or other income if the requirements are satisfied; an NFP entity is obligated to report the ERC as revenue. Entities should not net grants (ERC) with related costs in the Financial statement, according to FASB ASC 958-605.
Disclosure:
Entities that account for the ERC using the FASB ASC 958-605 model should follow the disclosure requirements in FASB ASC 958-310.
An entity shall disclose appropriate information concerning the amounts of the ERC, a description of the ERC, and the relevant conditions based on the disclosure requirements in FASB ASC 958-310-50-4 for conditional contributions.
ASU 2021-10, Government Aid (Topic 832): Disclosures by Business Entities Regarding Government Assistance, was recently released by the Financial Accounting Standards Board (FASB), mandating disclosures by business entities connected to the receipt of government assistance. A description of that ASU may be found below. ASU 2021-10 is not effective until the calendar year 2021, however, it can be implemented early.
Because contractors do not have precise instructions on how to deal with such ERC, we have offered disclosure guidelines below for two options:
- With FASB ASC 958-605, Income Statement in Not-for-Profit Organizations is treated as a conditional donation.
- Reporting for Grant Funding and Disclosures of Government Aid and Relevant Line item: Treat revenues as a grant.
How Do You Account for the ERC Receivable?
One other frequently asked query is how does one account for the Employee Retention Credit using different rules? Entities can choose from a number of accounting rules to account for ERCs, similar to the PPP. ERCs can not be included in ASC Topic 470: Debt, unlike PPPs. Instead, while evaluating the appropriate accounting for ERCs, the following accounting rules can be used:
- Accountability for Grant Funding and Disclosure of International Accounting Standards (IAS 20) is a set of accounting standard principles.
- Revenue Recognition, ASC 958-605, Not-for-Profit Entities
- Accounting Standards Codification (ASC 450-30).
- Appropriate Accounting Principles Determination:
Major corporations should account for ERCs with one of these protocols after determining which one would give the maximum transparency to financial statement consumers.
ERCs are structured as refundable payroll tax credit rather than loans, unlike PPP loans. If an entity used IAS 20 or ASC 958 to account for their PPP loans, it is assumed that they will use the same advice to report for their ERCs. Entities that account for their PPP payments under ASC 470, Debt must choose the most relevant guideline from the choices listed above.
Employee Retention Tax Credit Accounting Treatment
For-profit businesses, in particular, may struggle to account for payments received through the ERTC. Entities first should recognize that the ERTC is funded by a return of payroll taxes rather than income taxes when determining the proper accounting model to adopt.
As a result, ASC Topic 740, Income Taxes, does not apply to ERTC. Moreover, unlike the PPP, the ERTC is a refundable credit rather than a loan. Even when a company receives a credit advance, this is true. The ERTC would not be reported under ASC Topic 470, Debt, because it has a different appearance.
Because the ERTC is neither an income tax nor a debt, most businesses would treat it as a government grant when selecting which accounting methods to use.
Accounting choices for entities differ depending on whether they are for-profit or not-for-profit, similar to accounting for PPP loans. For-profit organizations may report for the ERTC as a state grant using ASC Subfield 958-605 (Subtopic 958-605) or IAS 20 as a guideline (IAS 20). If your company obtained a PPP loan and employed either Subfield 958-605 or IAS 20, the ERTC should be handled in the same way.
Learn more about All About Employee Retention Credit Taxable Income.
Treatment of Employee Retention Credit for Accounting Purposes Incase of For-profit Enterprises
The implementation of ASC 450-30 may benefit for-profit enterprises. ERCs would be considered to gain contingencies under ASC 450 if they were received in cash or as a credit towards present or prospective payroll taxes.
This strategy is more likely than the other ways to result in delayed recognition. Consultation is required for ERCs that exceed the allowed threshold of deception.
In ASC 740, the FASB Codification provides substantial advice for accounting for income taxes, but no such guidance exists for payroll taxes. Furthermore, because ERCs are refunds of payroll costs rather than government loans, Accounting Standards Codification (ASC) Topic 470, Debt, does not apply, as it did for some PPP loans.
For-profit businesses may examine the date of recognition, whether solvency metrics are relevant to them, as well as whether they wish to report a grant income line when deciding which accounting to use, including the criteria for gross vs. net presentation.
Employee Retention Credit Receivable on Financial Statements
If ERCs are received as a cash advance, the entity will record a liability for the cash until the requirements to earn the credit are substantially completed. A nonprofit organization is compelled to report the money as revenue when the requirements are satisfied, but a for-profit entity may record the Paycheck Protection Program as grant revenue or other income.
The award cannot be used to offset eligible expenditures under Subtopic 958-605. The application of judgment will be required to assess whether all requirements are substantially satisfied. Uncertainty over whether or not an entity qualifies for the credit indicates that the requirements were not substantially satisfied at the end of the period.
Since the arrangement under Subtopic 958-605 requires that significantly all conditions be met before the grant is recognized as income, entities must consider whether preparing and submitting the filing is a “more than administrative task” that should be deferred until the Internal Revenue Service filing is completed. Only for-profit organizations should use IAS 20 or ASC 450. Check out Employee Retention Credit IRS FAQs.
Conclusion and Summary on How to Report Employee Retention Credit on Financial Statements?
There is limited guidance on how to report Employee Retention Credit and other government assistance payments to business owners.
ERC advisers can provide you with the information you need to file, report, and defend your ERC claim. They can assist you in navigating the difficult qualifying rules and compiling adequate evidence to reduce the possibility of wrong financial reporting or ERC claims.
Check out our Ultimate Guide to 2021 Employee Retention Tax Credit.
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Help in Claiming the Employee Retention Tax Credit (ERC / ERTC): Receive Up to $26,000 Per Employee for Your Business
Disaster Loan Advisors can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program.
Depending on eligibility, business owners and companies can receive up to $26,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
Cover Image Credit: 123RF.com / Utah778 / Disaster Loan Advisors.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™