How the ERC Credit Could Impact Your R&D Tax Credits (2024)

FAQs

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

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.

The amount of your ERC reduces the amount that you are allowed to report as wage expense on your income tax return for the tax year in which the qualified wages were paid or incurred. Generally, most taxpayers claim wage expense as a deduction on their income tax returns.

Are there additional limitations? Yes, under the TCJA, the "25/25 limitation" restricts C-corporations with over $25,000 in regular tax liability from offsetting more than 75% of their tax liability using the R&D tax credit.

The R&D Tax Credit (26 U.S. Code §41) is a federal benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or improvement of products, processes, formulas, or software.

While the ERC is technically not taxable income in and of itself, the ERC will still affect your payroll deductions. As an employer or business that receives the employee retention credit, you must reduce your payroll expense deduction by the amount of the ERC claimed.

Is ERC Taxable Income? The good news is that your ERC refund is not taxable income. However, the ERC will affect what payroll deductions you can claim. Businesses that receive the ERC must reduce their payroll expense deduction by the amount of the credit.

What Is the R&D Tax Credit? The Research and Development tax credit is a federal tax liability reduction companies can take for approved domestic expenses. The rate of reduction is dollar for dollar. You also get back approximately 13 cents for every dollar spent on research that meets the eligibility requirements.

Typically, 6% to 8% of a company's annual qualifying R&D expenses can be applied, dollar for dollar, against its federal income tax liability. Various activities may qualify for the credit, including but not limited to: Developing processes, patents, formulas, techniques, prototypes or software.

The RDEC scheme returns 20% gross and 15% net of your qualifying R&D expenditure. The SME scheme returns up to 27%, and the credit is not subject to corporation tax. The main reason businesses need to claim through the RDEC scheme is their size. R&D-intensive SMEs have access to the highest %, which is 27%.

California Treatment of the Employment Retention Credit

Under federal law, employers that claim the ERC must reduce their wage and salary expense deduction by the amount of the ERC. California does not conform to these provisions and does not have a similar credit.

How much will I get back in ERC credit? ›

Calculating credits for 2021

The ERC applies only to the first three financial quarters of 2021, and the eligible wages for each of these quarters are calculated at 70%. As such, the credit per employee per quarter maxes out at $7,000.

With the stricter compliance reviews in place during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit. The IRS may also seek additional documentation from the taxpayer to ensure it is a legitimate claim.

As the IRS continues its moratorium on processing ERC claims submitted after Sept. 14, 2023, businesses will continue to have an option to pull back on any unprocessed claims.