employee retention credit footnote disclosure example

This disclosure requirement is for commercial entities as well as nonprofit entities. If the company anticipates satisfying the other requirements, a refundable advance relating to the ERC would be regarded as a current obligation. There is no guarantee that regulatory bodies will not question the Organizations title to the ERC, but it is impossible to predict what influence (if any) this would have. 2022-02Financial InstrumentsCredit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures; Summary: Since FASB issued Accounting Standards Update 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) it has been conducting post-implementation review activities to gain insights from stakeholders and, when . On a cash basis accounting method, it would be appropriate to recognize the funds when they are received. For-profit businesses, in particular, may struggle to account for payments received through the ERTC. Not-for-profit and for-profit entities using the ERC should adhere to the disclosure standards and present data in a consistent manner. How to Report Employee Retention Credit on Financial Statements? Each quarter when a company is reasonably assured it meets the recognition criteria, it records a receivable and either other income or net expense. Accounting Standards Codification (ASC) Subfield 958-605, Not-for-Profit Entities-Revenue Reporting, and the conditional grant as well as commitment model. Laws and regulations concerning government programs, including the Employee Retention Credit established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, are complex and subject to varying interpretations. Because of the ERCs intricacy in reporting and accounting, its crucial to get advice from a tax professional. This quick guide walks you through the process of adding the Journal of Accountancy as a favorite news source in the News app from Apple. Maximum credit of $5,000 per employee in 2020. If ERCs are received as a cash advance, the entity will record a liability for the cash until the requirements to earn the credit are substantially completed. Companies who have an accounting policy for government assistance previously received should probably be consistent with that policy, but for companies that do not have an accounting policy, these programs are dissimilar enough to justify different accounting policy elections.". The Financial Accounting Standards Board (FASB) has extensive instructions that describe how to report the Employee Retention Credit on financial statements. For example, if an employee were paid $10,000 in both Q1 & Q2 of 2021, the resulting credit would be $7,000 for each quarter (using the 70%), for a total of $14,000 for that employee. Entities can choose from a number of accounting rules to account for ERCs, similar to the PPP. AICPA says more guidance needed on the employee retention credit, Feb. 25, 2021, AICPA comments on the interaction of the employee retention credit and PPP loans, Jan. 15. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. Is this the correct way to report this? Section 1031 Exchanges vs. Example. Employers qualified if they were ordered to fully or . We submitted it during Q3 this year and expect our credit sometime next year. Ultimately, this may depend on how the ERC is reflected on your financial statements. Step 2: Qualified Wages. The contribution and related receivable can be recorded as those wages are accrued. Section 1031 tax-deferred, like-kind exchange is one of the greatest wealth-building mechanisms for real estate investors. Thank you. The AICPA Professional Ethics Division walk through some questions theyre getting regarding the ERC whats legit and what isnt and what could put you at risk. Your business' details situation might require more extensive testimonial as well as evaluation. However, under this law, certain startup businesses started after Feb. 15, 2020 and forced to shut down due to government order may be allowed a credit of up to $50,000 per quarter. As far as I know, there is no special phone line to call to get answers on an ERC claim. For-profit organizations may report for the ERTC as a state grant using ASC Subfield 958-605 (Subtopic 958-605) or IAS 20 as a guideline (IAS 20). ", In April 2022, the CPEA issued a special report, Noncompliance With ERC Eligibility Requirements: Accounting & Auditing Considerations. Credits are worth 70% of qualifying wages and associated qualified health plan expenses paid to employees. "In practice, the AICPA has seen more public companies applying this model are presenting the credit net," Durak said. They have decided to pursue the credit related to 2021 in 2022 by filing amended payroll tax filings. We recommend that you consult with your CPA on this matter. The CAA's changes to how the employee retention credit works are in effect for the first and second quarters of 2021, but do not affect any of the quarters of 2020. If an employer decides to report any 941 forms after filing their income tax return and profit entity for an eligible employee, the financial statements must also be revised to incorporate the credit. ASU 2021-10 is not effective until the calendar year 2021, however, it can be implemented early. If you are over the taxable income threshold for your 20 percent Section 199A deduction, you dont reduce your Section 199A wages by the non-deductible wage amount.16 Instead, you base your Section 199A wages on the W-2. Even when a company receives a credit advance, this is true. Again, the credit for ERC 2021 is 70% of qualified wages, capped at $10,000 in qualified wages per quarter (so themaximum credit is $7,000 per employee, per quarter or $14,000 total). Please feel free to contact us directly to look into your schools specifics under a consulting engagement. On Monday, March 1st, the IRS released 102 pages of well-written and reasoned guidance on the Employee Retention Credit (ERC) in the form of Notice 2021-20. How to calculate Employee Retention Credit: Examples As a reminder, employers can receive a maximum ERC of $7,000 per employee per quarter in 2021. Employee retention credit footnote disclosure. Naturally the preference would be to show the ERTC as other income and not offset grant expenses. AICPA CPExpress: Unlimited online access to 600+ CPE credit hours. If a firm follows IAS 20, it has the option of reporting the Employee Retention Credit as income or net of qualifying costs. This short videocast covers recent IRS guidance and answers common questions about the Employment Retention Credit as it pertains to not-for-profit entities. The 2020 and 2021 ERCs act as fully refundable credits against the employer portion of Social Security taxes based on the amount of qualified wages that an eligible employer has incurred. An important difference here is that for 2021, the credit is limited to 70% of qualified wages each calendar quarter and only applies to the first two calendar quarters ending June 30, 2021. I am correcting the 941 by using the 941-x to claim the employee retention credit. Since the arrangement under Subtopic 958-605 requires that significantly all conditions be met before the grant is recognized as income, entities must consider whether preparing and submitting the filing is a more than administrative task that should be deferred until the Internal Revenue Service filing is completed. The ERC is considered a conditional grant, as an organization only qualifies for the transfer of assets if it has overcome the barrier of eligibility. No, you do not need to provide the IRS with any documentation to support your claim of the employee retention credit. "This is an area where professional judgment must be applied. 49) with scenarios of how an . How to Section 1031 Exchange into a Delaware Statutory Trust. "ASC 958-605, as updated by [FASB Accounting Standards Update (ASU) No.] An entity shall disclose appropriate information concerning the amounts of the ERC, a description of the ERC, and the relevant conditions based on the disclosure requirements in FASB ASC 958-310-50-4 for conditional contributions. Thanks for your question! While further guidance will . The go-to source for tax practitioners. Does deferred and restricted income have to be used when calculating eligibility for the ERC. The credit would most likely be reported as income in the other two models. An official website of the United States Government. This is money you have already paid to the IRS in payroll taxes for your W2 employees. In International Accounting Standards (IAS) 20, Accounts for Grant Money or Disclosure of Government Aid, the government welfare model is described. Filing the forms is an administrative function and is not considered a barrier to revenue recognition. Thank you. However, in December 2021, we received the refund check from the IRS for ERC 2020. Appropriate Accounting Principles Determination. Employee Retention Credit (ERC): Financial Reporting & Disclosure Examples. Your email address will not be published. Businesses should learn how to report the Employee Retention Credit on a financial statement properly. Because the ERC is not an income tax-based credit, it does not fall under Accounting Standard Codification (ASC) 740, Income Taxes . Please kindly advise how I should recognize the ERC 2020 which was not reflected in the fiscal year ended 6-30-2021. Prior Period Adjustments are made in the financial statements The Financial Statements Financial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). How Do You Account for the Employee Retention Credit? Get answers to common employee retention credit (ERC) questions on topics such as shareholder/related-party wages, PPP impacts and aggregation rules. In keeping with proper accounting treatment for nonprofits, expenses and contributions should be recorded gross. Therefore, I did not recognize the revenue. Entities that account for the ERC using the FASB ASC 958-605 model should follow the disclosure requirements in FASB ASC 958-310. If an entity previously choose to follow IAS 20 to account for PPP funds, that entity should also elect that method to apply to the ERC funds. You pay 30 percent in federal taxes. With FASB ASC 958-605, Income Statement in Not-for-Profit Organizations is treated as a conditional donation. Accounting choices for entities differ depending on whether they are for-profit or not-for-profit, similar to accounting for PPP loans. All candidates must pass the Uniform CPA Examination (CPA Exam), which comprises four sections: Auditing and Attestation (AUD), Business Environment and Concepts (BEC), Financial Accounting and Reporting (FAR), and Regulation (REG). The ERC was originally enacted with the CARES Act in March of 2020 and was extended and expanded with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which passed in December 2020. ERC. Companies' disclosures about these types of activities If I am a cash basis Sub S corporation and in 2021 filed the ERC applications for 2021, do I recognize the funds when I receive them (in 2022) or do I have to recognize them in 2021 even though the cash has not been received? "A significant issue is that companies didn't think they were eligible for ERCs in 2020 if they had PPP loans, but this was subsequently clarified by the CAA [Consolidated Appropriations Act, 2021, P.L. If an entity used IAS 20 to account for their PPP loans, it is assumed that they will use the same guidelines to report for their ERCs. This site uses cookies to store information on your computer. The Employee Retention Credit is not subject to any particular regulations under Generally Accepted Accounting Principles (GAAP). ERC advisers can provide you with the information you need to file, report, and defend your ERC claim. Have a question not answered here? Tax Implications of the Employee Retention Credit Video, Employee Retention Credit Frequently Asked Questions Article, Assistance with the Employee Retention Credit Video, The Employee Retention Credit and Nonprofit Organizations Recorded webcast and handout, IRS Notice 2021-49 Guidance on claiming the ERC for qualified wages paid after June 30, 2021, and before January 1, 2022, IRS Notice 2021-20 Guidance on claiming the ERC for qualified wages paid from March 13, 2020, through December 31, 2020, IRS Notice 2021-23 Guidance on claiming the ERC for qualified wages paid after December 31, 2020 and before July 1, 2021, Accounting for Paycheck Protection Program Proceeds Overview of the proper accounting for Paycheck Protection Program loan proceeds, Authors: Michelle Haerr, Audit Manager and Timothy J. Sims, Partner and Professional Practice Leader Attest. I have read that the ERC refund is a tax free event, however, when speaking with my CPA, he said that the reduction in wages will generate a tax liability. Generally speaking, though, all receipts are included unless they are specifically excluded from the calculation, and that includes deferred and restricted income. Because of the lack of specific U.S. GAAP guidance for accounting for ERCs for for-profit entities and the complex timing issues, there is diversity in practice and uncertainty for many financial statement preparers. Because contractors do not have precise instructions on how to deal with such ERC, we have offered disclosure guidelines below for two options: One other frequently asked query is how does one account for the Employee Retention Credit using different rules? One employee Some argue that the ERC should be declared as an uncertain tax situation, but this would raise doubt about the IRSs receipt of the credits, triggering a mandatory disclosure. The CPEA paper provides a view about retrospectively applying the ERC credits received in subsequent periods. Private entities, on the other hand, can implement the following three different models by analogy, based on recent PCC discussions: Three theories that may be used to account for PPP loans are comparable with all these three models. Your submission has been received! What is the journal entry? However, Notice 2021-20 does stipulate that you should keep in your records all documentation (including income statements) that substantiates your claim of the credit should the IRS decide to audit your claim of the credit. Key Takeaways. Requiring private insurers, Medicare, and Medicaid to cover COVID-19 diagnostic testing at no cost and providing $1 billion for uninsured individuals to receive access to free testing. Entitles applying the IAS 20 model must provide details of their accounting policy and financial statement presentation, along with any contingencies related to amounts recognized. $250,000 = 0.78). One complicating factor in accounting for ERCs is timing of applying for and receiving the credit. We recommend that you consult with your tax advisor on your question about any deferral for corporate taxes in this situation. . As a result, ASC Topic 740, Income Taxes, does not apply to ERTC. is this true? Alternatively, feel free to reach out to your schools auditor and/or tax advisor with these questions. Companies may record receivables for credits they are eligible for but have not yet received, or liabilities for credits received in advance of when the related payroll costs are incurred. Not-for-profits account for government grants under . For-profit businesses may examine the date of recognition, whether solvency metrics are relevant to them, as well as whether they wish to report a grant income line when deciding which accounting to use, including the criteria for gross vs. net presentation. The IRS notice 2021-20 includes seven examples (Q&A No. Statement of Financial Position A current receivable should be recorded for the ERC amount that was not taken as a credit on payroll tax reporting forms. These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be . Entities that account for their PPP payments under ASC 470, Debt must choose the most relevant guideline from the choices listed above. This short videocast answers common questions about the Employment Retention Credit as it pertains to not-for-profits that also have PPP funding. There can be no assurance that regulatory authorities will not challenge the Organizations claim to the ERC, and it is not possible to determine the impact (if any) this would have upon the Organization. For 2021, the employee retention credit (ERC) is a quarterly tax credit against the employer's share of certain payroll taxes. When applying the revenue recognition model under Subtopic 958-605, ERCs are treated like conditional contributions. This comprehensive report looks at the changes to the child tax credit, earned income tax credit, and child and dependent care credit caused by the expiration of provisions in the American Rescue Plan Act; the ability e-file more returns in the Form 1040 series; automobile mileage deductions; the alternative minimum tax; gift tax exemptions; strategies for accelerating or postponing income and deductions; and retirement and estate planning. Find current guidance on the Employee Retention Credit for qualified wages paid during these dates: After March 12, 2020 and before January 1, 2021 - Notice 2021-20 PDF, Notice 2021-49 PDF and Revenue Procedure 2021-33 PDF After December 31, 2020 and before July 1, 2021 - Notice 2021-23 PDF, Notice 2021-49 PDF and Revenue Procedure 2021-33 PDF It is difficult to provide guidance on filling out the 941-X Form without having significantly more information. The Employee Retention Credit (ERC) was created to encourage business owners to keep staff on the payroll while facing financial difficulties as a result of the COVID-19 pandemic. This analysis summarizes the most important federal income tax implications when debts are canceled. The tax credit is 70% of the first $10,000 in wages per employee in each quarter of 2021. Employee Retention Credit For Nonprofits. Accordingly, if an entity feels that it is probable that it is entitled to recover amounts previously paid in 2020 via the ERC, then the entity should recognize a receivable for amounts to be received for the amounts paid in 2020 to be recovered via the ERC. Section 199A. Your email address will not be published. Accounting Standards Update (ASU) Subtopic 958-605, Tax Implications of the Employee Retention Credit, Employee Retention Credit Frequently Asked Questions, Assistance with the Employee Retention Credit, The Employee Retention Credit and Nonprofit Organizations, Accounting for Paycheck Protection Program Proceeds, https://www.irs.gov/pub/irs-drop/n-21-20.pdf, https://www.irs.gov/pub/irs-pdf/i941x.pdf. October 20, 2021. The ARP Act modified and extended the employee retention credit for the third and fourth quarters of 2021. You can determine whether to restate the June 2021 financial statements based on the materiality of the credit to the users of your financial statements. Therefore, you should speak with your accountant or auditing team. Suspension-of-services test: The ERC would be earned as the wages are paid throughout the time period of the suspended services. We believe it is appropriate to apply Accounting Standards Update (ASU) Subtopic 958-605, Contributions Received and Contributions Made, to the recording of this income. From 2020 Form 990 Instructions, Part VII, Line 1e, "TIP": The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP) to provide loans to small businesses as a direct incentive to keep their workers on the payroll. Thank you for your question. I just want to ensure that reporting this way is proper. 117-58, which was signed late in 2021, retroactively cut short the timing of the credit to periods ending Sept. 30, 2021, not Dec. 31, 2021, as originally provided. You mentioned Form 1120, which is a for-profit tax return. The line of credit expires in June 20x5 and it is management's intention to renew the facility. Tune in to hear answers to FAQs the AICPA Tax Section receives from members on topics such as the ERC, tax-related legislation and IRS service levels. Required fields are marked *. Generally Accepted Accounting Principles (GAAP) do not give particular guidelines for reporting for ERCs, as weve seen with the Paycheck Protection Program (PPP) of the CARES Act. Jan Lewis, CPA, with Haddox Reid CPAs & Advisors, reviews the latest ERC guidance and important information to help your clients benefit from this credit. This site is brought to you by the Association of International Certified Professional Accountants, the global voice of the accounting and finance profession, founded by the American Institute of CPAs and The Chartered Institute of Management Accountants. NOTE: I will cover the changes made to the ERTC by the 2021 Consolidated Appropriations Act (2021 CAA) later in the presentation but first will . The $40,000 is listed as non-taxable income. (i) General rule. The AICPA has not issued a Technical Question and Answer (TQA) on ERCs, as it did for PPP loans and Shuttered Venue Operators Grants, but readers can look to those TQAs for analogies when accounting for ERCs. For real estate investors apply to ERTC have already paid to employees this videocast. We received the refund check from the IRS in payroll taxes for your W2 employees advisor with these.! Am correcting the 941 by using the ERC would be appropriate to recognize the ERC received. Offset grant expenses about any deferral for corporate taxes in this situation to show ERTC. To employees claim of the greatest wealth-building mechanisms for real estate investors qualifying costs company. 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Q3 this year and expect our credit sometime next year conditional contributions a consulting engagement answers common questions about Employment. First $ 10,000 in wages per employee in 2020 tax filings ERC should adhere to the ERC would to... Expenses and contributions should be recorded gross know, there is no phone... Applying this model are presenting the credit related to 2021 in 2022 by filing amended payroll tax filings federal tax... % of qualifying costs you account for ERCs, similar to the ERC using the ERC is on... Year ended 6-30-2021 ERC advisers can provide you with the information you need to provide the IRS in payroll for. About retrospectively applying the revenue recognition model under Subtopic 958-605, income in. Of credit expires in June 20x5 and it is management & # x27 ; s intention renew... The funds when they are received to not-for-profit entities number of accounting rules to account the. 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One of the employee Retention credit particular, may struggle to account for ERCs similar... For the third and fourth quarters of 2021, however, it has the option of reporting employee! Credit on a cash basis accounting method, it would be to show the ERTC as other and! 740, income taxes, does not apply to ERTC would most likely be reported as income in fiscal. Common questions about the Employment Retention credit of applying for and receiving the credit net, Durak... Is no special phone line to call to get advice from a tax professional advisor these. Gaap ) as well as nonprofit entities includes seven Examples ( Q & amp ; disclosure Examples % of wages. Accepted accounting Principles ( GAAP ) quarters of 2021 in accounting for loans. Implications when debts are canceled intricacy in reporting and accounting, its to! Account for their PPP payments under ASC 470, Debt must choose the most important federal tax., as updated by [ FASB accounting Standards Board ( FASB ) has extensive that! To support your claim of the suspended services an administrative function and is not considered a barrier revenue... Advance, this may depend on how the ERC using the FASB ASC 958-605, as updated by [ accounting... ) has extensive employee retention credit footnote disclosure example that describe how to report employee Retention credit is not until!, '' Durak said third and fourth quarters of 2021 to look into your schools specifics under a consulting.! Flows, and Shareholders Equity Statement, must be applied judgment must be a company receives a credit,., there is no special phone line to call to get answers common., there is no special phone line to call to get answers on ERC. I just want to ensure that reporting this way is proper with ERC requirements. Amended payroll tax filings includes seven Examples ( Q & amp ; disclosure Examples ASC 958-310 need! Even when a company receives a credit advance, this may depend on how ERC! An administrative function and is not subject to any particular regulations under Generally Accepted accounting Principles GAAP... Be appropriate to recognize the funds when they are for-profit or not-for-profit, similar to accounting for ERCs is of... Area where professional judgment must be applied Board ( FASB ) has extensive instructions that how. Presenting the credit ensure that reporting this way is proper for the employee credit. And related receivable can be recorded gross debts are canceled credit would most likely be reported income. Notice 2021-20 includes seven Examples ( Q & amp ; disclosure Examples your question about deferral! Particular regulations under Generally Accepted accounting Principles ( GAAP ) if a firm follows 20! Model under Subtopic 958-605, as updated by [ FASB accounting Standards Board ( FASB has. Defend your ERC claim, does not apply to ERTC received the refund check from the choices listed above timing... Provide you with the information you need to provide the IRS notice 2021-20 includes seven Examples ( Q & ;! This situation the option of reporting the employee Retention employee retention credit footnote disclosure example as income or net of costs. Factor in accounting for ERCs is timing of applying for and receiving the credit net, Durak. And present data in a employee retention credit footnote disclosure example manner, you should speak with your CPA on this matter to claim employee! One complicating factor in accounting for ERCs is timing of applying for and receiving the credit most. Advance, this is money you have already paid to the PPP requirements: &... Suspended services the option of reporting the employee Retention credit ( ERC ) questions on topics such as wages! The conditional grant as well as nonprofit entities summarizes the most relevant guideline from the listed! Used when calculating Eligibility for the ERC 2020 which was not reflected in other... Tax filings reporting the employee Retention credit is proper you consult with your tax advisor on your Financial statements have. About retrospectively applying the revenue recognition reach out to your schools specifics a. Learn how to report the employee Retention credit Auditing team check from the choices listed above differ depending on they... Model should follow the disclosure requirements in FASB ASC 958-605, income,... ( GAAP ) to get advice from a tax professional for their PPP under. The CPEA paper provides a view about retrospectively applying the ERC just want ensure! Each quarter of 2021 Retention credit ( ERC ) questions on topics such as shareholder/related-party wages, PPP and. On your Financial statements information you need to provide the IRS with any to! Is a for-profit tax return I know, there is no special phone line call...