Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) allows taxpayers to generate a tax credit based on wages paid during COVID-related government shut down periods in addition to periods of financial distress (lowered revenue). While this benefit has demonstrated its usefulness for many taxpayers in many different industries, the ERC has an inverse relationship with the R&D tax credit. This is due to the fact that any wages qualified by a taxpayer for the ERC cannot also be qualified for the R&D tax credit. As such, many taxpayers saw a dip in the amount of credit that could be generated, even if their activity and expenses did not decrease during 2020 and 2021. 

There are, however, strategies that can be employed to minimize the impact of the ERC on the R&D tax credit calculation. The first is to determine exactly who was qualified for the ERC and how much each employee's wage impact was. Since the ERC can add non-R&D-qualified costs such as healthcare allocating as much of the qualified ERC expenses toward non-R&D-qualified employees and employee healthcare costs is one such strategy. One benefit of the R&D tax credit that still remains in an ERC eligible year is that while Owner and owner-related-family wages are not qualifiable for the ERC, they can still be qualified for the R&D tax credit. So while the credit may dip due to ERC qualification, it is still a good idea to generate an R&D tax credit to ensure you are not leaving any benefits off your timely filed return.