What Is an ERC Receivable? How to Account For It

The Employee Retention Credit (ERC) was a refundable tax credit established to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. This measure provided financial assistance to eligible employers. For businesses that qualify, the ERC represents a claim against the U.S. Treasury, commonly referred to as an “ERC receivable.”

Defining an ERC Receivable

An ERC receivable represents a claim a business holds against the U.S. Treasury for the Employee Retention Credit. This claim is similar in nature to an accounts receivable that a business typically has from a customer for goods or services provided.

Unlike traditional accounts receivable that arise from sales, an ERC receivable originates from a federal tax credit program designed to provide economic relief. The credit is applied against certain employment taxes, and if the credit amount exceeds the employer’s tax liability, the excess is refundable. This refundable characteristic is what transforms the credit into a receivable when it has been earned but not yet received.

The ERC receivable is not a loan and does not need to be repaid by the business. It functions as a direct reduction of payroll tax liability, with any surplus being returned to the employer. It is a government refund or offset that enhances a business’s cash position.

Determining Eligibility and Credit Amount

To establish an ERC receivable, a business must meet specific eligibility criteria for the periods wages were paid between March 13, 2020, and December 31, 2021. There are two primary ways to qualify: experiencing a significant decline in gross receipts or a full or partial suspension of business operations due to government orders. It is important to note that the rules for eligibility and credit calculation vary between 2020 and 2021.

For 2020, an employer qualified if their gross receipts for any calendar quarter were less than 50% of their gross receipts for the same calendar quarter in 2019. Eligibility ended in the quarter after the quarter in which gross receipts exceeded 80% of the gross receipts for the same 2019 quarter. For 2021, the gross receipts threshold was less stringent, requiring gross receipts for a quarter to be less than 80% of the gross receipts for the same quarter in 2019. The gross receipts generally include total sales (net of returns and allowances) and all amounts received for services, including investment income.

Alternatively, a business could qualify if its operations were fully or partially suspended due to a government order limiting commerce, travel, or group meetings due to COVID-19. A full suspension means the business was completely shut down by such an order. A partial suspension could occur if a significant portion of the business operations were suspended, or if government orders modified operations resulting in a more than nominal impact. This includes situations where businesses had to alter operations to comply with health and safety requirements, such as restricting indoor dining or limiting capacity.

Once eligibility is determined, the credit amount is calculated based on “qualified wages” paid to employees. Qualified wages include cash wages (hourly and salaried), vacation pay, other taxable wages, and certain qualified health plan expenses. For 2020, the credit was 50% of qualified wages, up to $10,000 in wages per employee for the entire year, resulting in a maximum credit of $5,000 per employee. For 2021, the credit was increased to 70% of qualified wages. The per-employee wage limit was also adjusted to $10,000 per employee per quarter, allowing a maximum credit of $7,000 per employee per quarter for the first three quarters of 2021. This could lead to a total maximum credit of $21,000 per employee for the 2021 calendar year.

Claiming the ERC Receivable

After a business determines its eligibility and calculates the credit amount, the primary method for claiming the ERC receivable for prior periods is by filing an amended employment tax return. For most businesses that file quarterly employment tax returns, this involves using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. A separate Form 941-X is generally required for each quarter for which the ERC is being claimed.

When completing Form 941-X, businesses must provide their employer identification number and other identifying information. They will indicate the specific quarter and year being amended and typically select the option to claim a refund or abatement. The form requires adjustments to previously reported wages and taxes, reflecting the qualified wages used for the ERC calculation.

Businesses must reduce their wage expense deduction on their income tax return by the amount of the ERC claimed for that same tax period. This often necessitates amending the corresponding income tax returns.

It is important to retain comprehensive supporting documentation for the claim, including payroll records, gross receipts data, and evidence of government orders if qualifying under the suspension test. While electronic filing options may exist, completed forms are typically mailed to the IRS. The deadlines for filing Form 941-X are generally three years from the due date of the original Form 941. For example, claims for 2020 wages were due by April 15, 2024, and for 2021 wages by April 15, 2025.

Accounting Treatment of the ERC Receivable

Recognizing an ERC receivable on financial statements involves specific accounting considerations. When a business has met the eligibility criteria and the right to receive the credit is established, the ERC receivable is recognized as an asset on the balance sheet. It is typically classified as a current asset, reflecting its expected conversion to cash within one year.

The impact of the ERC on the income statement can be presented in a few ways, depending on the accounting framework adopted. One common approach is to treat the credit as a reduction of wage expense or other operating expenses, as the credit directly relates to and offsets payroll costs. Alternatively, some businesses may recognize the ERC as “other income” on the income statement.

The timing of recognition is crucial; the receivable and associated income are recorded when the eligibility conditions are substantially met. For instance, if eligibility is based on a decline in gross receipts, the right to the credit might be recognized at the end of the quarter when the revenue comparison is complete. If qualifying under the suspension test, the credit is earned as wages are paid during the period of suspension.

Because U.S. Generally Accepted Accounting Principles (GAAP) do not provide explicit guidance for government grants to for-profit entities, businesses often analogize to other accounting standards. For example, some may apply principles similar to those for conditional contributions, recognizing the receivable and income when all conditions are met and the claim is probable. Regardless of the specific presentation, adequate disclosures about the nature and amount of the credit, as well as the accounting policy used, should be made in the financial statements.

Receiving and Reconciling the Credit

Once an ERC claim has been submitted, the IRS typically issues the credit in the form of a direct refund check, a direct deposit, or an offset against future payroll tax liabilities. The method of delivery depends on the employer’s tax situation and IRS procedures. For instance, if a business normally makes federal tax deposits, the credit may reduce or eliminate future deposit requirements.

Processing times for ERC claims can be lengthy and vary considerably. The IRS has experienced significant backlogs and has paused processing new claims to review existing submissions due to concerns about improper claims. Businesses have reported waiting anywhere from several months to over eight months for their refunds.

Upon receiving the credit, businesses should carefully reconcile the amount received with the amount claimed. Discrepancies can occur, and it is important to investigate any differences. If the full amount is not received or if there are questions about the payment, contacting the IRS directly or through the Taxpayer Advocate Service may be necessary.

Maintaining thorough records throughout the entire process is important. This includes documentation of eligibility, calculations, submitted forms, and all communications with the IRS. Accurate record-keeping supports the claim in case of an IRS audit and helps ensure proper financial reporting and reconciliation of the received funds.