Koch’s Corner: Accounting for the Employee Retention Tax Credit

Koch’s Corner delivers concise, “need to know” summaries of important updates on accounting and assurance issues for privately-held companies.

By Richard Koch, CPA
Director of Quality Control at Gray, Gray & Gray

The Employee Retention Tax Credit (“ERC”) has provided many employers with significant tax credits for retaining workers.  While the Paycheck Protection Program (“PPP”) involved loans which are potentially forgiven, ERC’s are potentially refundable as payroll tax credits, and therefore neither debt (ASC 470) or income taxes (ASC 740) apply.

One key consideration however is that the ERC accounting options for an entity will depend on whether they are for-profit or not-for-profit.

Not-for-Profit Entities
When it comes to a not-for-profit entity, the U.S. generally accepted accounting principles (“U.S. GAAP”) require following FASB Subtopic 958-605, “Not-for-Profit Entities – Revenue Recognition” (“Subtopic 958-605”); and would therefore apply that accounting model, including presentation and disclosure. A not-for-profit entity would not be able to elect to analogize to International Accounting Standard 20, “Accounting for Governmental Grants and Disclosure of Government Assistance” (“IAS 20”).

If the organization receives the ERC as an advance, it will record a liability for the cash received until such time that the conditions to earn the credit are substantially met.  When conditions are met, a not-for-profit entity is required to record the income as revenue.

For-Profit Entities
U.S. GAAP does not provide a business entity with specific accounting treatment for governmental grants which results in accounting by analogy. Accordingly, a for-profit entity should account for the ERC as a government grant by analogy to either Subtopic 958-605 or IAS 20.

If the business entity received a PPP loan and used either Subtopic 958-605 or IAS 20, it would be expected to apply the same method to the ERC.

Subtopic 958-605 – A for-profit entity that elects to apply the guidance in Subtopic 958-605 would consider the ERC as a non-exchange transaction with a governmental entity that is accounted for as a conditional contribution.

When conditions are met, a for-profit entity may record the amount as grant revenue or other income. However, Subtopic 958-605 does not permit an entity to net the grant against qualifying costs.

Disclosures should describe the accounting model applied, significant terms of the program, and a description of the relevant line items and amounts recognized within the financial statements. When amounts have not been recognized because conditions have not been substantially met, these conditions should be disclosed.

IAS 20 – Government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes expenses for the related costs for which the grants are intended to compensate. In the case of grants related to assets, this requires setting up the grant as deferred income or deducting it from the carrying amount of the asset.

A government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received.

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, should be recognized as income in the period in which it becomes a receivable.

A grant relating to assets may be presented in one of two ways: (a) as deferred income; or (b) by deducting the grant from the asset’s carrying amount.

A grant relating to income may be reported separately as “other income” or deducted from the related expense. 

The following must be disclosed for government grants: (a) accounting policy adopted for grants, including method of balance sheet presentation; (b) nature and extent of grants recognized in the financial statements; and (c) unfulfilled conditions and contingencies attaching to recognized grants. 

If you have questions regarding accounting for the ERC, please contact Richard Koch at (781) 407-0300 or via email at rkoch@gggllp.com


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