The IRS has issued updated FAQ guidance on accounting for the ERC on income tax returns, addressing situations where wage expenses were not reduced and where reduced expenses were later denied.  

Taxpayers eligible for the Employee Retention Credit (ERC) in 2020 and 2021 claimed it by filing Form 941 or amended Form 941s. This required them to reduce wage expenses on their federal income tax returns. However, IRS processing delays caused many taxpayers to postpone amending their income tax returns while they waited for their ERC. Others amended and paid additional tax, only to have the IRS later denied their ERC claims.   

In Summary

• The Internal Revenue Service has released updated guidance clarifying ambiguities surrounding Employee Retention Credit (ERC) claims and their impact on wage deduction reporting on tax returns.
• Due to the IRS’s extended review and processing timeline for ERC claims, taxpayers should be aware that credit approval or denial may occur significantly after their initial filing, potentially affecting tax planning and financial forecasting.

Due to these complexities, taxpayers were unsure how to proceed, especially with expired 2020 amendment deadlines. The IRS FAQ aims to resolve this uncertainty.   

Updated IRS guidance addresses two common ERC situations, offering practical relief for taxpayers.    

1. ERC Refund Received: Income Tax Amendment Not Previously Filed 

The IRS has updated guidance for businesses that received an ERC refund but did not amend their prior-year income tax returns. Instead of amending, they can now report the ERC refund as income in the year it is received. To illustrate, if a business gets a $700 ERC refund in 2024 for a 2021 claim, it can report it as 2024 income, thus avoiding the need to amend their 2021 return. 

2, IRS Guidance: ERC Refund Disallowed, Wage Expense Previously Reduced   

The IRS provides practical relief for businesses facing disallowed ERC claims after reducing wage expenses. Instead of amending prior-year returns, they can increase wage expenses in the disallowance year. For example, a 2024 disallowance for a 2021 claim allows a 2024 wage expense adjustment, simplifying the process.   

Conclusion

The Internal Revenue Service continues to review and process Employee Retention Credit (ERC) claims. This extended timeline means many taxpayers may receive their credit or face claim denial considerably after their initial filing date. For guidance on managing ERC-related matters, taxpayers would benefit from consulting with an established, reputable CPA firm to understand their available options and next steps fully. Feel free to contact Huckabee CPA with any questions or a free consultation.