The Employee Retention Tax Credit (ERTC) is a tax credit provided by the U.S. government to encourage businesses to retain their employees during times of economic hardship, such as the COVID-19 pandemic. The accounting treatment for the ERTC depends on whether you’re an accrual basis or cash basis taxpayer and the specific time period you are applying for the credit. As of my last knowledge update in September 2021, here’s a general guideline for the accounting treatment:
- Accrual Basis Taxpayers:
- Recognition of Credit: Under the accrual basis of accounting, you recognize income (or in this case, a reduction in expenses) when it is earned and becomes reasonably estimable. In the case of the ERTC, you would recognize the credit as income when you meet the eligibility criteria for each eligible quarter.
- Recording the Credit: When you determine that you qualify for the ERTC for a specific quarter, you would record the credit as follows:
- Debit a receivable account (e.g., “ERTC Receivable”) to recognize the credit you expect to receive from the IRS.
- Credit a revenue account or reduce the corresponding payroll expense account by the same amount to reflect the reduction in payroll expenses due to the credit.
- Disclosure: Ensure that your financial statements and disclosures reflect the ERTC as an income or reduction in expenses, as applicable, for each eligible quarter.
- Cash Basis Taxpayers:
- Recognition of Credit: Cash basis taxpayers recognize income and expenses when actual cash transactions occur. Therefore, you would recognize the ERTC as income when you receive the cash refund from the IRS for each eligible quarter.
- Recording the Credit: When you receive the ERTC refund from the IRS, you would record it as follows:
- Debit the cash account to increase your cash balance.
- Credit a revenue account or reduce the corresponding payroll expense account by the same amount to reflect the reduction in payroll expenses due to the credit.
- Disclosure: In your financial statements, disclose the ERTC as income received during the period.
It’s important to note that the specific accounting treatment may vary depending on your unique circumstances, and it’s essential to consult with a qualified accountant or tax professional who is familiar with your business’s financial and tax situation. Additionally, tax laws and regulations may change over time, so it’s crucial to stay informed about any updates or changes to the ERTC and its accounting treatment.