Congress approved programs to provide financial assistance to companies during the COVID-19 pandemic, including the employee retention credit (ERC). The ERC provides eligible employers with per-employee credits based on qualified wages and health insurance benefits paid. There are differences in the time of recognition and presentation of financial statements. By applying the income recognition model of sub-theme 958-605, ERCs are treated as conditional contributions.
Businesses must have substantially met the program's eligibility conditions to record revenues, and amounts will not be recorded until all criteria have been evaluated and substantially met. Sub-topic 958-605 requires that gross revenues be recorded and does not allow any compensation of income with related expenses. IAS 20 allows you to record and present the gross amount as other income or to offset the credit with related payroll expenses. Every quarter, when a company is reasonably certain that it meets the recognition criteria, it records an account receivable and other net income or expenses.
In practice, the AICPA has seen more public companies that apply this model present the credit network, Durak said. One factor that complicates the accounting of ERC is the time to apply for and receive credit. Businesses can record receivables for credits that they are eligible for but have not yet received, or debts for credits received before incurring related payroll costs. Because of the lack of specific guidance under the U.S.
GAAP for accounting for for-profit entities' ERCs and complex scheduling issues, there is diversity in practice and uncertainty for many financial statement preparers. The FASB has not published specific guidelines on other accounting issues related to COVID in the past and has instead relied on the AICPA guidelines, Galasso said. The AICPA has not published a technical question and answer (TQA) on ERC, as it did with PPP loans and grants for closed facility operators, but readers can consult these TQs for analogies when accounting for ERC. The Journal of Accountancy is now fully digital.
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In the case of an employer that is not subject to the limitations described above for larger employers, qualifying salaries are generally those that are paid to all employees during the qualifying hardship period, and not just those related to employees who do not work due to economic hardship. Wages paid to employees for whom the employer is allowed a work opportunity tax credit for a specified period cannot be qualifying wages for the ERC either. When done correctly, this will effectively introduce an employee's “negative payroll information”, so that the ERC tax refund you receive can be related to a specific employee. I will share information and guidelines on how to apply for the employee retention credit in QuickBooks Online (QBO).
While ERC is not considered taxable income, under Section 280C of the IRC, tax credits for employers create a reduction in wages in the amount of the credit. The Employee Retention Credit (ERC) is a refundable tax credit granted under the CARES Act to eligible employers who experience a significant decrease in gross income or certain closures related to COVID-19.
