How the ERC Credit Could Impact Your R&D Tax Credits

The Employee Retention Credit (ERC, but also known as the ERC credit) provided some relief for organizations during the pandemic. However, cash flow could be impacted when your organization claims the ERC credit as well as an R&D tax credit.

How Does the ERC Credit Impact R&D Credits?

While claiming both the R&D and ERC credits in the same year is permitted, any wages considered in determining the ERC credit won’t be eligible for the R&D tax credit, according to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Taxpayers that are eligible to claim both the ERC and R&D tax credits should assess qualified wages for both.

There are specific steps to take when claiming both federal tax credits to help increase the cash flow for your business. To decrease the negative impact on the R&D tax credit, it’s important to apply expenses that aren’t considered qualified research expenses towards the ERC credit. This will allow maximum benefit for each credit generated.

Other Tax Credits

Other tax credits that may impact the R&D tax credit include:

Identify Tax Credits to Claim

Reach out to your R&D accounting professional to try and boost the credits available if your company historically claimed the R&D tax credit, was financially impacted by the COVID-19 pandemic, and could be eligible for the ERC credit.

Impact of the ERC Credit and Paycheck Protection Program (PPP)

The CARES Act also provided PPP loans to employers affected by COVID-19.

While PPP loans don’t impact federal qualified research expenses for the R&D tax credit, wages paid by a PPP loan aren’t eligible for the ERC credit. This adds another step when calculating both the R&D and ERC credits.

ERC Credit Background Information

The ERC credit is a refundable payroll tax credit available to eligible employers March 13, 2020 through September 30, 2021. The credit was created to assist employers significantly impacted by COVID-19.

Who Qualifies for the ERC Credit?

Employers could qualify for the ERC credit in 2021 if they meet one of the following conditions:

  • The business was fully or partially suspended due to a governmental order from an appropriate government authority—federal, state, or local—that limited commerce, travel, or group meetings due to COVID-19.
  • The business had at least a 20% reduction in gross receipts for a calendar quarter in 2021 as compared with the same calendar quarter in 2019.

Additionally, for employers with 500 or fewer full-time employees, measured as average employment in 2019, the credit applies to wages paid to all employees.

For employers with more than 500 full-time employees, the credit only applies to wages paid to employees during the time they weren’t providing services.

What Are Qualified Wages?

Qualified wages for the ERC credit consist of gross employee wages and employee-paid health plan expenses.

For 2021 filings, a maximum of $10,000 of gross wages and health plan expenses per employee may be used to generate a credit in each eligible quarter.

It’s worth noting that health plan expenses are pre-tax dollars and aren’t treated as qualified wages for purposes of calculating the R&D tax credit.

We’re Here to Help

For guidance in understanding how the ERC and other credits could impact your R&D tax credit, or help with boosting tax incentives, please contact your Moss Adams professional.

Discover more information about the R&D payroll tax credit and tax credits and incentive resources.

Contact Us with Questions

Enter security code:
 Security code