How to Maximize your ERC and R&D Credit Values|
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At a glance:
- Taking a stance: Aprio’s interpretation of official guidance supports that businesses may use the same wages for both ERC and R&D credits for 2020, but there’s no double-dipping for 2021.
- Impact on your business: Companies claiming the ERC and R&D will see no impact now but could see a decreased R&D credit for the 2021 tax year.
- Next Steps: Businesses that benefit from these credits need to create a strategy now to ensure they remain compliant with the latest regulations while still maximizing credit values.
Don’t undermine your business’s potential benefits or risk non-compliance by failing to strategize your tax credit approach. Aprio can help you create a holistic tax credit strategy that’s always aligned with the latest official guidance.
The full story:
With potential credit values of up to $33,000 per employee across 2020 and 2021, the Employee Retention Credit (ERC) is one of the most valuable lifelines available to businesses impacted by COVID-19. However, the eligibility rules and interplay with other credits are complex; without the right strategy in place, you risk leaving money on the table or, worse, exposing your company to IRS penalties.
The IRS has clarified that , but “double-dipping” (or using the same wages to generate credits and request loan forgiveness) is expressly forbidden. This guidance begs the question: how does the ERC impact the calculation of other wage-based credits, like the Research and Development (R&D) credit?
Unfortunately, the only guidance the IRS has provided on this matter leaves room for interpretation. Aprio has carefully analyzed the rules and regulations for both credits, as well as the most recently published FAQs and Notices, before taking a position. Based on our interpretation of ERC and R&D guidelines, we have both good news and bad news if your company has historically benefited from the R&D credit.
First, the bad news: ERC DOES impact R&D for 2021 credits
The Consolidated Appropriations Act provides the first statement that the same wages cannot be used for both the ERC and R&D credits. Since this legislation was designed to go into effect on January 1, 2021, and provides the first such reference to R&D, Aprio believes that this exclusion applies only to credits claimed for the 2021 tax year.
Because most businesses are just now computing their R&D credits for the 2020 tax year, the impact of this exclusion won’t be felt immediately. However, it does reinforce the need to think strategically when claiming your ERC. The decisions you make now could impact the future value of your R&D credit for 2021.
Now, the good news: ERC DOES NOT impact R&D for 2020 credits
When interpreting tax legislation and regulations, recognizing what isn’t stated is often equally important as understanding what is.
Before the Consolidated Appropriations Act, no other legislation or official IRS guidance referenced the R&D credit or its interaction with the ERC. However, the CARES Act, which originally established the ERC, stated that businesses could not double-dip wages for the Work Opportunity Credit (WOTC) or the paid leave credits established by the FFCRA.
The specific mention of these credits and the clear exclusion of R&D could be interpreted as deliberate. Regardless, there is no legal basis through legislation or formal IRS guidance for excluding wages used for the ERC from R&D calculations before 2021.
- Speaking of ERC strategy, you may want to rethink your small employer status
- Read more about ERC and PPP loan forgiveness
- Here’s an easier way to understand your ERC eligibility
The bottom line
Businesses that benefit from wage-based credits like the R&D credit need to know how their ERC strategy will affect future credit values. If you are currently claiming the ERC or if you think you may qualify, you need a targeted strategy to make sure you’re maximizing your credits from all angles without risking non-compliance. Aprio’s ERC and R&D teams can help you build a holistic tax credit plan that will always put your business’s needs and compliance first.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.