Your Business & the Employee Retention Tax Credit

The ERC program was created under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) as part of the federal government's relief program to encourage and reward business owners that retain employees during the COVID-19 pandemic. Recently the policy was amended to enable business owners to qualify for ERC tax credits even if they received PPP loans. The time program covers were also extended from March 22, 2020, to December 31, 2021.

Does My Business Qualify?
The eligibility requirements for ERC are as follows:

However, an exception to this rule is constructive ownership due to the business partners being related. A business owner may only own 50% or less and still not qualify for the ERC credit.

Example 1

If the business is owned 50% by the son & 50% by the father - both partners are considered 100% constructive owners because they are related. So in this case, their wages and their relative wages would not qualify for the ERC credit.

Example 2

If a company has three business partners and they're all brothers, they are all considered 100% constructive owners due to being related, and their wages don't qualify for the ERC credit.
Under this rule, entities are considered a single employer if they are under common control and applying rules similar to the parent-subsidiary or brother-sister controlled group rules or the rules for a combined group of corporations.

When you receive your ERC funds, you will need to let your CPA or tax preparer know about this. These funds are not taxed as gross income, but it does reduce your payroll expenses. We suggest that you wait until you receive your refund and know your final total received, as well as the amount of interest the IRS paid out on top of the refund.
Then let your tax preparer process the associated income tax returns. Each client's taxes have a very different situation (ie, cash basis, accrual basis, loss/profits). For this reason, we cannot give advice on your individual business's income tax situation. It will be essential for you to have this discussion with your tax professional once the final amounts are received.

Here is information regarding the ERC and income taxes directly from the IRS website:

Does an Eligible Employer receiving an Employee Retention Credit for qualified wages need to include any portion of the credit in income? No. An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer's applicable employment taxes nor the refundable portion of the credit is included in the employer's gross income.

Does the Employee Retention Credit reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return?

Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying for the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that the amount of the credit would reduce an employer's aggregate deductions as a result of this disallowance rule.