ERC Accounting: Best Practices & Mistakes to Avoid

ERC Accounting
Table of Contents

The employee retention credit, also known as the ERC, was a program the government originally created for businesses to retain their employees during the pandemic. For those who were able to obtain this credit, it is best that you thoroughly understand how to account for the credit.

This includes disclosures and how to recognize the credit as revenue. If you need additional guidance on how to account for the employee retention credit and what mistakes to avoid when accounting for the credit, continue reading below. We will cover all you need to know about accounting for the ERC and who you can contact for more information. 

Determining ERC Accounting Treatment

After your company applies for and receives the credit, you must then determine the proper accounting treatment. Both employee retention credits for 2020 and 2021 are fully refundable against your business’s part of Social Security taxes based on the qualified wages that you’ve incurred. 

How to Properly Account for Employee Retention Credit

If your business is eligible for the employee retention credit, you must know which accounting standard governs the account. When recording this income, most recommend to apply “Accounting Standards Update Subtopic 958-605”. The government considers the ERC as a conditional grant as most companies only qualify if they meet the eligibility requirements.  

Posting the Credits and Debits

Contributions and expenses for the ERC should be recorded as gross. Your company’s tax liability will be accrued for the entire amount prior to the receipt of the employee retention credit.

When recording the employee retention credit, it should be recorded as a credit to grant income and a debit to accounts receivable. If your organization received the credit as advance payments, the refundable advance liability is credited and the cash is debited. 

Complying with Your Accounting Standard

To ensure that you follow compliance, make sure your business follows the disclosure and presentation principles under the accounting standard you choose. For example, in GAAP, it is strongly recommended that you don’t net the income with the expenses incurred to get the income because GAAP typically does not allow net presentation in financial statements. 

For IAS 20, you have the option to either show the ERC income as “other income” or you have the opportunity to net the income against the expenses. Under either of those methods, entities must consider if the presentation is misleading and an adequate disclosure should be made about the nature and the amount of the credits your business received. 

Disclosures Required by ASU 2021-10

In addition to providing information about the nature of the credits received, be sure to include disclosures mandated by ASU 2021-10. Amendments in ASU 2021-10 require businesses to list certain disclosures about transactions with their government entity. These disclosures are then accounted for by applying by applying contribution or grant accounting models. 

Disclosure requirements:

  • Information of the reason for these transactions
  • Related accounting policy used
  • Line items on the income statement and balance sheet affected by the ERC
  • Significant terms and conditions of the transactions
  • Commitments and contingencies

If you are unsure of how to present this information, there are specialists you can reach out to for further assistance. For example, you can reach out to certain companies, like ERC Today, for help with understanding and organizing this information. 

Common ERC Mistakes and Misunderstandings

There are a few common misunderstandings that a great majority of organizations have when it comes to the employee retention credit. For example, many companies believed that they were not eligible for this credit because they previously claimed funds from the Paycheck Protection Program (PPP).

Fortunately, thanks to the CAA (Consolidated Appropriations Act), eligible businesses were able to claim both. Under the act, congress eliminated the restrictions that stated you could only claim one over the other. 

My Business Did Not Shut Down

Another common misconception was that you could not claim the credit if your business did not completely shut down. Businesses that were shut down, even partially, due to government order (regardless of if it was state, local or federal), may qualify for the credit. For example, if your business had to reduce its hours due to a government order, your business may still qualify for the credit. 

Other examples of a partial shutdown that may qualify:

  • Hours reduced to accommodate cleanings and in-depth sanitization
  • Shutting down certain business locations but not others
  • Having a limited capacity
  • Shutdowns of your vendors or supply chain

Those are a few examples that could qualify your business for the ERC. The main question the program asked for is, “was your business unable to continue operations due to government-ordered complete or partial suspension and did this negatively impact your business operations?”.

If you answered, “yes” then you could still possibly qualify. Keep in mind that this is only one test that determines your eligibility and you must also qualify for the gross receipt reduction test. 

My Business Was Essential Therefore I Don’t Qualify

If there was a change or an impact to your business, you could still qualify even if you were deemed essential. For example, if you were open, but your suppliers or vendors were closed, you may still qualify. If a portion of your business was deemed non-essential and it was impacted by a government order, there is a chance you could qualify for the credit. 

Accounting for Employee Retention Credit Help

Accounting for the employee retention credit may seem difficult, especially if you are unsure of what guidance to use. There are also some common mistakes your business should avoid when accounting for this credit or retroactively claiming it. If you need assistance with properly accounting for this credit or you just have questions about the employee retention credit in general, contact us

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