Maximizing Your Savings: A Complete Guide to the Employee Retention Credit

As a business owner, maximizing your savings is always top of mind, especially during times of economic uncertainty. In response to the COVID-19 pandemic, the government has implemented various relief programs to help businesses stay afloat. One such program is the Employee Retention Credit (ERC). In this complete guide, I will walk you through what the ERC is, how it works, how to qualify, how to claim it, and how it compares to the Paycheck Protection Program (PPP). Let’s get started.

 

Introduction to the Employee Retention Credit

The Employee Retention Credit is a refundable tax credit that is available to eligible employers who retained their employees during the COVID-19 pandemic. The credit is designed to help businesses keep their employees on payroll, even if they had to shut down or experienced a significant decline in revenue. The ERC was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020.

What is the Employee Retention Credit?

The Employee Retention Credit is a tax credit that is equal to 50% of the qualified wages paid to each employee. The maximum credit amount is $5,000 per employee for the entire calendar year. Qualified wages are wages paid to an employee between March 13, 2020, and December 31, 2021, and must meet certain criteria. The credit is refundable, which means that if the credit exceeds the employer’s payroll tax liability, the excess credit is refunded to the employer.

How does the Employee Retention Credit work?

To claim the Employee Retention Credit, eligible employers must meet certain criteria. First, the employer must have experienced a full or partial suspension of operations due to a government order related to COVID-19, or the employer must have experienced a significant decline in gross receipts. Second, the employer must have retained their employees during the period of the suspension or decline in gross receipts. Third, the wages paid to the employees during the eligible period must meet certain criteria.

The credit is calculated on a quarterly basis, and the maximum credit amount is $5,000 per employee for the entire calendar year. If an employer has more than 100 employees, the credit is only available for wages paid to employees who are not providing services due to the suspension or decline in gross receipts. If an employer has fewer than 100 employees, the credit is available for all wages paid to eligible employees, regardless of whether they are providing services or not.

Qualifying for the Employee Retention Credit

To qualify for the Employee Retention Credit, employers must meet certain criteria. First, the employer must have experienced a full or partial suspension of operations due to a government order related to COVID-19, or the employer must have experienced a significant decline in gross receipts. A significant decline in gross receipts is defined as a decline of 50% or more in gross receipts for a calendar quarter compared to the same quarter in the previous year.

Second, the employer must have retained their employees during the period of the suspension or decline in gross receipts. Employers who have furloughed or laid off employees are not eligible for the credit. However, if the employer has rehired the previously laid off or furloughed employees, they may be eligible for the credit.

Third, the wages paid to the employees during the eligible period must meet certain criteria. The wages must be paid between March 13, 2020, and December 31, 2021, and must be qualified wages. Qualified wages are wages paid to an employee during the eligible period that meet certain criteria.

How to claim the Employee Retention Credit

To claim the Employee Retention Credit, eligible employers must file Form 941, Employer’s Quarterly Federal Tax Return, for the applicable calendar quarters. Employers can claim the credit on their Form 941 by reporting the qualified wages and the amount of the credit on Line 11c. If the credit exceeds the employer’s payroll tax liability, the excess credit is refunded to the employer.

Employers can also elect to reduce their federal employment tax deposits in anticipation of the credit. The amount of the anticipated credit can be reflected on Line 13b of the Form 941.

Maximizing your savings with the Employee Retention Credit

To maximize your savings with the Employee Retention Credit, it is important to understand how the credit works and how to qualify for it. First, make sure that you meet the eligibility criteria by experiencing a full or partial suspension of operations due to a government order related to COVID-19, or a significant decline in gross receipts. Second, retain your employees during the period of the suspension or decline in gross receipts. Third, make sure that the wages paid to the employees during the eligible period meet the criteria for qualified wages.

It is also important to keep track of the credit and to claim it on your Form 941 for the applicable calendar quarters. By claiming the credit, you can reduce your payroll tax liability and potentially receive a refund of the excess credit.

Employee Retention Credit vs. Paycheck Protection Program

The Employee Retention Credit and the Paycheck Protection Program (PPP) are both relief programs designed to help businesses during the COVID-19 pandemic. However, there are some key differences between the two programs.

The PPP is a loan program that provides forgivable loans to small businesses to help cover payroll and other eligible expenses. The loans are forgivable if the business uses the funds for eligible expenses and maintains employee and compensation levels.

The ERC, on the other hand, is a tax credit that is available to eligible employers who retained their employees during the COVID-19 pandemic. The credit is calculated on a quarterly basis and is equal to 50% of the qualified wages paid to each employee, up to a maximum credit of $5,000 per employee for the entire calendar year.

It is possible for a business to qualify for both the PPP and the ERC, but the same wages cannot be used to qualify for both programs.

Frequently asked questions about the Employee Retention Credit

  1. What is the maximum credit amount for the Employee Retention Credit? The maximum credit amount is $5,000 per employee for the entire calendar year.
  2. How do I claim the Employee Retention Credit? To claim the credit, eligible employers must file Form 941, Employer’s Quarterly Federal Tax Return, for the applicable calendar quarters.
  3. Can I qualify for both the Employee Retention Credit and the Paycheck Protection Program? Yes, it is possible for a business to qualify for both programs, but the same wages cannot be used to qualify for both programs.

Employee Retention Credit resources and tools

The IRS has provided various resources and tools to help businesses understand and claim the Employee Retention Credit. These resources include:

  • Employee Retention Credit FAQs
  • Employee Retention Credit Eligibility Tool
  • Form 941 instructions

Conclusion

The Employee Retention Credit is a valuable relief program that can help businesses maximize their savings during the COVID-19 pandemic. By understanding how the credit works, how to qualify for it, and how to claim it, businesses can take advantage of this valuable benefit. Remember to keep track of the credit and to claim it on your Form 941 for the applicable calendar quarters. If you have any questions or need assistance, consult with a tax professional or visit the IRS website for more information.

If you found this guide helpful, please share it with other business owners who may benefit from the Employee Retention Credit.

FASB ASU 2014-09 and Nonprofit Grants: Determining the Right Revenue Framework

Revenue Recognition · ASC 606 · ASC 958-605 · Practical Guidance for Nonprofit Organizations

The issuance of FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers, prompted significant debate within the nonprofit sector regarding the scope of the new guidance — specifically, whether grants and similar contracts qualify as exchange (reciprocal) or nonexchange (nonreciprocal) transactions.

This article provides a concise framework to help nonprofit organizations navigate two foundational questions when evaluating grants and similar funding arrangements: whether the contract constitutes an exchange transaction, and — if it does not — whether any associated donor-imposed conditions affect revenue recognition timing.

Question 1: Is This an Exchange or a Nonexchange Transaction?

The first step in any analysis is determining who receives the primary benefit from the arrangement. This distinction determines whether ASC 606 or ASC 958-605 applies.

Key determination: Ask — does the resource provider receive direct, commensurate value in return for the resources transferred? Or is the resource provider acting as a third-party payer on behalf of an identified customer?

Exchange Transaction → Follow ASC 606

If the resource provider receives direct commensurate value, or is a third-party payer on behalf of an identified customer, the arrangement is an exchange transaction governed by ASC 606. The revenue recognized reflects the underlying contract — such as patient service revenue, tuition revenue, or similar.

Nonexchange Transaction → Follow ASC 958-605

If the benefits flow to a specified third party who is not a customer of the nonprofit, or to the general public, the arrangement is a nonexchange transaction subject to ASC 958-605. No reciprocal transfer of commensurate value exists between the parties.

In practice, government grants that reimburse a nonprofit for services provided to the general public — with no identifiable customer relationship — are typically classified as nonexchange transactions. Conversely, a government agency paying on behalf of specific program participants (e.g., Medicaid payments for individual patients) would be treated as an exchange transaction under ASC 606.

Question 2: Is the Contribution Conditional or Unconditional?

Once a transaction is classified as a nonexchange contribution subject to ASC 958-605, the next determination is whether any donor-imposed conditions exist — because conditions affect when the contribution may be recognized as revenue.

A contribution received with donor-imposed conditions is recognized as revenue only when the condition or conditions have been substantially met. An unconditional contribution is recognized as revenue upon receipt (or upon notification of the promise, in the case of unconditional promises to give).

Two Elements Required for a Donor-Imposed Condition

  1. A right of return or right of release. The agreement must give the resource provider the right to have assets returned, or release the nonprofit from its obligation to perform, if the condition is not met.
  2. A barrier tied to that right of return or release. The agreement must contain a substantive barrier that the nonprofit must overcome before it is entitled to the resources.

Evaluating Whether a Barrier Exists

Not every stipulation rises to the level of a “barrier.” To assess whether a given requirement constitutes a genuine barrier, nonprofits may consider the following indicators within the contribution agreement:

  • Level of service. The agreement specifies a measurable quantity or quality of service the nonprofit must deliver before the resources are released.
  • Specific output or outcome. Funding is contingent on achieving a defined output (e.g., serving a minimum number of beneficiaries) or a specific outcome (e.g., a measurable improvement in a target population).
  • Limits on recipient discretion. The stipulation meaningfully constrains the nonprofit’s conduct — for example, a requirement to comply with OMB Uniform Guidance regulations restricts how funds may be spent and how activities must be conducted. This represents a substantive barrier rather than an administrative formality.

Practical note: Many federal and state grant agreements include compliance requirements (such as OMB Uniform Guidance) that, when tied to a right-of-return provision, will constitute donor-imposed conditions — meaning revenue should be deferred until the conditions are substantially met. Nonprofits should evaluate each agreement on its specific terms rather than applying a blanket policy.

Summary Framework

When a nonprofit receives a grant or similar funding arrangement, the following sequential analysis applies:

Step 1 — Classify the transaction. Determine whether the resource provider receives direct commensurate value (exchange → ASC 606) or whether the benefit flows to a third party or the public (nonexchange → ASC 958-605).

Step 2 — Assess conditionality. For nonexchange transactions, evaluate whether the agreement contains both a right of return/release and a substantive barrier. If both elements are present, the contribution is conditional and revenue is deferred until the condition is substantially met.

Step 3 — Identify indicators of a barrier. Review the agreement’s stipulations — level of service, required outputs or outcomes, and limitations on recipient discretion — to determine whether they constitute substantive barriers or merely administrative conditions.

This article provides general educational information and does not constitute accounting or legal advice. Nonprofits should consult their independent auditors and advisors when applying these standards to specific arrangements.

New Lease Standard a Bird’s-eye view

Lease Accounting FASB ASC 842 Balance Sheet Impact

ASC 842 · ASC 840 · Finance Leases · Operating Leases · Right-of-Use Assets · Technical Guidance for Finance Professionals

FASB Accounting Standards Codification Topic 842, Leases, represents one of the most consequential changes to financial reporting in decades — requiring entities to bring virtually all leases onto the balance sheet for the first time and fundamentally altering how lessees recognize, measure, and disclose their leasing obligations.

Prior to ASC 842, operating leases were disclosed only in the footnotes, allowing significant off-balance-sheet financing that obscured a company’s true financial leverage. The new standard eliminates that asymmetry. As FASB noted in its Basis for Conclusions, the revised approach “will result in a more faithful representation of a lessee’s assets and liabilities and, together with the enhanced disclosures required by FASB ASC 842, greater transparency about a lessee’s financial leverage and its leasing activities.”

This article provides a comprehensive technical walkthrough of ASC 842 for accounting professionals and financial statement preparers — covering scope, lease identification, classification criteria, key defined terms, balance sheet recognition mechanics, and illustrative journal entries.

Standard at a Glance

Supersedes

ASC 840

Previous lease accounting standard

Effective Date

Dec 15, 2018

Public entities. Dec 15, 2021 for private entities.

Primary Change

Balance Sheet

Operating leases now capitalized as ROU assets and lease liabilities.

Section 1: Scope and the Revised Lease Definition

The first and most foundational step under ASC 842 is determining whether a contract is, or contains, a lease. This determination is critical because the accounting treatment for a lease arrangement differs materially from that of a service contract. Misclassification at this stage cascades into errors in balance sheet presentation, income statement recognition, and required disclosures.

Lease Definition: ASC 840 vs. ASC 842

ASC 840 — Previous Definition ASC 842 — Revised Definition
An agreement conveying the right to use property, plant, or equipment (land or depreciable assets, or both) usually for a stated period. A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period in exchange for consideration.

Two Critical Changes in the Revised Definition

“Control” — The lessee must have both: (1) the right to obtain substantially all of the economic benefits from use of the identified asset, and (2) the right to direct how and for what purpose the asset is used throughout the period of use. Mere access rights or shared-use arrangements generally do not constitute control.

“In exchange for consideration” — The arrangement must involve a quid pro quo. This requirement distinguishes leases from gratuitous arrangements and aligns lease identification with the broader contract definition under U.S. GAAP.

Once an entity determines that a contract contains a lease, it must classify the lease under one of three categories established by ASC 842, and evaluate each lease component separately (unless the entity elects the practical expedient to combine lease and non-lease components for a given asset class).

Section 2: The Three Lease Classifications Under ASC 842

ASC 842 establishes three lease classifications for lessees. Classification drives the pattern of expense recognition and the presentation of lease-related cash flows. Each classification is determined at the commencement date of the lease and reassessed only if the lease is modified.

Classification 01

Finance Lease

Replaces the former capital lease. Amortization of the ROU asset and interest on the lease liability are recognized separately. Front-loaded expense pattern reflects time value of money.

Classification 02

Operating Lease

Now recognized on the balance sheet as an ROU asset and lease liability. Single straight-line lease cost within operating expenses. Most significant change from ASC 840.

Classification 03

Short-Term Lease

Lease term of 12 months or less at commencement; no purchase option reasonably certain to be exercised. Practical expedient available; payments recognized in income statement only.

Section 3: Finance Lease — Classification Criteria and Key Changes from ASC 840

Under ASC 840, a lease was classified as a capital lease if it met any one of four bright-line tests. ASC 842 retains the “any one of five criteria” structure but replaces two tests with principle-based standards, eliminating specific numeric thresholds in favor of judgment-oriented language.

Capital Lease (ASC 840) vs. Finance Lease (ASC 842) — Criteria Comparison

# ASC 840 — Capital Lease ASC 842 — Finance Lease Change
1 Lease transfers ownership to the lessee by end of the lease term. Lease transfers ownership of the underlying asset to the lessee by end of the lease term. Unchanged
2 Lease contains a bargain purchase option. Lease grants the lessee an option to purchase the asset that the lessee is reasonably certain to exercise. Revised
3 Lease term equals 75% or more of estimated economic life of the asset. Lease term is for the major part of the remaining economic life of the underlying asset. Revised
4 PV of minimum lease payments equals or exceeds 90% of the fair value of the asset. PV of lease payments plus lessee-guaranteed residual value equals or exceeds substantially all of the fair value of the underlying asset. Revised
5 Not present under ASC 840. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. New

Policy Shift: Elimination of Bright-Line Thresholds

Under ASC 840, the 75% useful life and 90% fair value thresholds were objective, mechanical tests that also enabled lease structuring to achieve off-balance-sheet treatment for economically equivalent arrangements — a practice FASB sought to curtail.

ASC 842 replaces these with principles-based language (“major part” and “substantially all”). While FASB did not mandate specific percentages, many preparers and auditors continue to apply 75% and 90% as reasonable reference benchmarks — provided judgment, not mechanics alone, drives the conclusion. Thorough documentation of the rationale at commencement date is essential.

Section 4: Key Defined Terms Under ASC 842

Precise application of ASC 842 depends on a thorough understanding of its defined terms. Misapplication of any one of the following concepts can produce material errors in the measurement of the right-of-use asset and lease liability.

Commencement Date

The date on which a lessor makes an underlying asset available for use by a lessee. This is the measurement date — the point at which the lessee has sufficient information to calculate the present value of future minimum lease payments and record the initial right-of-use asset and lease liability on the balance sheet.

Practical note: Commencement date may differ from the lease execution (signing) date. The ROU asset and lease liability must not be recorded before commencement, even if the agreement has been signed.

Lease Term

The noncancelable period of the lease, plus:

  • Periods covered by an option to extend the lease, if the lessee is reasonably certain to exercise that option;
  • Periods covered by an option to terminate the lease, if the lessee is reasonably certain not to exercise that option; and
  • Periods covered by options to extend or terminate that are controlled solely by the lessor.

Practical note: “Reasonably certain” is a high threshold — substantially higher than “more likely than not.” A significant economic incentive must exist. Entities must reassess lease term upon a significant event or change in circumstances within the control of the lessee.

Discount Rate

The rate used to discount future lease payments to their present value. ASC 842 establishes the following hierarchy:

  1. Rate implicit in the lease — used when readily determinable by the lessee.
  2. Incremental borrowing rate (IBR) — the rate the lessee would pay to borrow a collateralized loan over a similar term for an amount equal to the lease payments, in the same currency and economic environment.
  3. Risk-free rate — available as a practical expedient for nonpublic entities only (elected by class of underlying asset).

Practical note: The rate implicit in the lease is rarely determinable by a lessee (it requires knowledge of the lessor’s residual value assumptions). Most lessees will use the IBR. The IBR determination requires significant judgment, must reflect collateralization, and should be documented thoroughly at commencement date.

Right-of-Use (ROU) Asset

An asset representing the lessee’s right to use an underlying asset for the duration of the lease term. Measured at the present value of remaining lease payments, adjusted for:

  • Lease incentives received from the lessor (reduces the ROU asset);
  • Initial direct costs incurred by the lessee (increases the ROU asset); and
  • Any prepaid lease payments made at or before commencement (increases the ROU asset).

Practical note: The ROU asset and lease liability will often differ in initial measurement due to the above adjustments. Entities should not assume they are equal at commencement date.

Section 5: Operating Lease — Recognition, Measurement, and Journal Entry

The most operationally significant change introduced by ASC 842 is the on-balance-sheet recognition of operating leases. Under ASC 840, operating leases generated no balance sheet entries — only footnote disclosure and straight-line income statement expense. Under ASC 842, the lessee must record both a right-of-use asset and a corresponding lease liability at commencement.

Illustrative Example — Operating Lease at Commencement Date

Lease Term

10 Years

 Annual Payment

$30,000 / yr

 Discount Rate (IBR)

3.00%
PV Calculation: PV of annuity of $30,000 for 10 periods at 3%
= $30,000 × [(1 − (1.03)−10) / 0.03]
= $30,000 × 8.5302 = $255,906 (ordinary annuity)

Note: The journal entry below reflects an annuity-due structure (first payment at commencement), resulting in an ROU asset of $372,017 and a lease liability of $342,017 net of the $30,000 cash payment. Preparers should recalculate using their specific lease payment timing.

Journal Entry — Commencement Date (January 1, 2022)

Date Account Debit ($) Credit ($)
1/1/2022 Right-of-Use Asset 372,017 —
Lease Liability — 342,017
Cash — 30,000
To record operating lease at commencement; first annual payment made on lease execution date. 372,017 372,017

Subsequent Measurement — Operating Lease

  • Lease liability: Accretes using the effective interest method at the rate established at commencement. Reduced by each lease payment made during the period.
  • ROU asset: Adjusted each period as the plug needed to produce a constant total lease cost; not independently straight-lined.
  • Lease cost: Recognized as a single, straight-line operating expense equal to total undiscounted lease payments divided by the lease term. This is the defining feature distinguishing operating leases from finance leases under ASC 842.
  • Cash flow classification: All payments classified as operating activities in the statement of cash flows.

Section 6: Finance Lease vs. Operating Lease — Accounting Impact

Attribute Finance Lease Operating Lease
Balance Sheet ROU asset + lease liability recorded ROU asset + lease liability recorded
ROU Asset Amortization Straight-line over lease term (or useful life if ownership transfers) Adjusted each period as a plug to produce straight-line total lease cost
Interest Expense Presented separately; front-loaded (effective interest method) Not presented separately; blended into single operating lease cost
Expense Pattern Front-loaded — higher in early years as interest is greatest Straight-line — equal expense each period
Income Statement Amortization (operating) + interest expense (non-operating) Single lease cost line within operating expenses
Cash Flow Principal: financing activities; Interest: operating or financing (policy election) All payments: operating activities
EBITDA Impact Amortization and interest both added back; typically improves reported EBITDA Lease cost is operating; no separate interest addback
Debt Ratios Presented as finance lease liability alongside debt obligations Presented separately as operating lease liability; may affect covenant calculations

Section 7: The Short-Term Lease Practical Expedient

ASC 842 provides a practical expedient for short-term leases. A lease qualifies as short-term if, at the commencement date, it has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise. The expedient must be elected by class of underlying asset, not on a lease-by-lease basis.

When Expedient Is Elected

  • No ROU asset or lease liability recorded on the balance sheet.
  • Lease payments recognized straight-line in the income statement over the lease term.
  • Variable lease payments not dependent on an index or rate recognized as incurred.
  • Total short-term lease cost disclosed in the notes.

Common Pitfalls

A lease with a 12-month initial term that includes a renewal option the lessee is reasonably certain to exercise does not qualify — the lease term must include that renewal period, exceeding 12 months.

A series of short-term leases for the same asset may indicate continuous use, which auditors may scrutinize as an attempt to circumvent balance sheet recognition.

Section 8: Step-by-Step Decision Framework for Applying ASC 842

Step 1

Does the contract contain a lease?

Apply the revised ASC 842 definition. Is there an identified asset? Does the lessee obtain substantially all economic benefits? Does the lessee direct how and for what purpose the asset is used? All three must be met.
Step 2

Does the short-term lease expedient apply?

Is the lease term 12 months or less at commencement with no purchase option reasonably certain to be exercised? Has the expedient been elected for this class of asset? If yes, recognize payments in the income statement only.
Step 3

Classify the lease as finance or operating

Evaluate all five finance lease criteria. If any one is met → finance lease. Otherwise → operating lease. Document the analysis for each criterion, with particular rigor for the judgment-based tests (criteria 2–4).
Step 4

Determine lease term and discount rate

Establish the full lease term including renewal or termination options where exercise is reasonably certain. Determine the discount rate using the hierarchy: rate implicit in the lease → IBR → risk-free rate (nonpublic entities only). Document IBR analysis at commencement.
Step 5

Record and subsequently measure the ROU asset and lease liability

Calculate the present value of future lease payments and record the initial journal entry at commencement. Apply subsequent measurement: straight-line total lease cost for operating leases; separate amortization and interest for finance leases. Reassess and remeasure upon triggering events.

This article provides general technical information for educational purposes and does not constitute accounting, audit, or legal advice. The application of ASC 842 requires careful consideration of the specific facts and circumstances of each leasing arrangement. Entities should consult their independent auditors and qualified advisors before implementing changes to accounting