Congress recently passed a very favorable extension and expansion of the Employee Retention Credit (ERC). This initiative is a huge help for taxpayers who have seen or continue to see a significant decline in revenue or have been forced into full or partial suspension of their normal business.
Taxpayers who plan to take advantage of the ERC can also still claim the Research Tax Credit (RTC), but there are some considerations that need to be followed to ensure that no double counting towards credits occurs. Specifically, the qualified wages that can be claimed towards the ERC include employee wages or employee health plan expenses that are properly allocable to the wages. Typically, wages are also predominately the main source of qualified research expense with the RTC.
A company may not double count and get a benefit from claiming credits based on the same wages for purposes of the ERC and other credits, like the RTC.
For Tax Year 2020
- For businesses with more than 500 employees, the ERC was only applicable to those employees who were not performing services. If they were not performing services, then they would not be engaged in any qualified research activities, and this time should not be captured towards the RTC calculation.
For Tax Year 2021
- The revised RTC requirements specifically exclude any wages used to establish the ERC from being treated as qualified for RTC reasons. Taxpayers claiming both these credits need to make sure that there is no duplication in these wages being used for the ERC and the RTC.
It is not clear how taxpayers will be able to adequately show that separation between Employee Retention Credit wages and RTC wages. Requests for guidance on this, and other practical applications, are pending.
For Taxpayers working to complete their 2020 tax return and credits, DST can assist in determining an accurate method to show the removal of any wages used towards the 2020 ERC claim. There are several approaches that can be taken to quantify the RTC wages accurately.