How to Report Employee Retention Credit on Form 1065
The Employee Retention Credit (ERC) is a tax credit introduced by the CARES Act to encourage businesses to retain their employees during the COVID-19 pandemic. If you are a partnership filing Form 1065, it’s important to know how to report this credit accurately. Here’s a step-by-step guide on how to report the Employee Retention Credit on Form 1065:
1. Determine eligibility: Before reporting the credit, ensure that you meet the eligibility criteria. Your business must have experienced a significant decline in gross receipts or a full or partial suspension of operations due to government orders.
2. Calculate the credit: Determine the amount of the credit your partnership is eligible for. The ERC is equal to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee per year.
3. Complete Form 941: Fill out Form 941, Employer’s Quarterly Federal Tax Return, to report the wages used to calculate the ERC. Make sure to adjust the amount of wages reported on Line 5a, “Taxable Social Security wages,” and Line 5c, “Taxable Medicare wages & tips,” to exclude the wages used for the credit.
4. Fill out Form 8974: Complete Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, to determine the amount of the credit to include on Form 1065.
5. Report on Form 1065: On Form 1065, U.S. Return of Partnership Income, report the Employee Retention Credit on Schedule K, Line 13, using the code “J.” Include the total amount of the credit on Line 13f.
6. Attach necessary documentation: Attach Form 8974 to your Form 1065 to support the calculation of the credit. Ensure that all required information is included and accurate.
7. Review and file: Review the completed Form 1065 and all attached forms for accuracy. Once verified, file your return by the due date.
1. Can partnerships claim the Employee Retention Credit?
Yes, partnerships can claim the Employee Retention Credit using Form 1065.
2. Is there a limit to the amount of credit a partnership can claim?
No, there is no limit to the amount of credit a partnership can claim. However, the credit is subject to certain limitations based on qualified wages.
3. Can the Employee Retention Credit be carried forward or back?
No, the Employee Retention Credit cannot be carried forward or back. It can only be used to offset current year tax liabilities.
4. What documentation should be retained to support the credit claim?
Partnerships should retain documentation that supports their eligibility for the credit, such as records of significant decline in gross receipts or government orders that led to a suspension of operations.
5. Can partnerships claim both the Employee Retention Credit and the Paycheck Protection Program (PPP) loan forgiveness?
Yes, partnerships can claim both credits. However, the same wages cannot be used for both credits.
6. Are self-employed partners eligible for the Employee Retention Credit?
No, self-employed partners are not eligible for the Employee Retention Credit. The credit is only available for wages paid to employees.
7. Can partnerships amend their previous tax returns to claim the Employee Retention Credit?
Yes, partnerships can amend their previous tax returns to claim the Employee Retention Credit if they were eligible but did not claim it initially. However, there is a limited time frame to do so.