The IRS has recently updated its Employee Retention Credit (ERC) guidance, specifically addressing how the ERC update impacts your tax return. Many businesses have faced challenges adjusting their wage expenses, and this ERC update clarifies how to handle ERC refunds, disallowed claims, and tax return amendments.
ERC Impacts Your Income Tax Return
Under the original ERC guidance, businesses that claimed the credit were required to adjust their wage expense on their Income Tax Return for the year the wages were paid. This adjustment reduced the wage expense by the amount of the ERC claimed, effectively increasing taxable income.
Under the ERC update, the IRS offers various options for claiming the ERC on your Income Tax Return if any of the situations below apply to you.
- You did not reduce your wage expense on your original Income Tax Return (related to that ERC period) and your claim was allowed.
- You reduced your wage expense on your Income Tax Return, but your claim was disallowed.
You Received an ERC Refund but Didn’t Amend Your Tax Return
If you received an ERC refund but did not reduce your wage expense on your Income Tax Return, you can report the ERC as gross income in the year you received the payment. This allows you to correct the issue without amending your return.
Example
Your business claimed ERC for the tax year 2021, but you did not amend the 2021 tax return. You received your 2021 Refund in 2024. You then report gross income on your 2024 Tax Return for the ERC claim.
Please reference Section Income Tax & ERC, Q2 on the FAQ website.
Adjust Your Tax Return if Your ERC Claim Was Denied
You can take the following steps to adjust for your denied ERC Claim. See the options listed below:
- You can increase your wage expense on your tax return by the same amount that it was reduced when you made your original claim. You will need to report the increase in the wage expense in the year the disallowance was finalized.
- You may be able to file an amended return, AAR, or protective claim for the refund to increase the wage expense for the year in which ERC was claimed. Please be aware that there is a limited amount of time to file amended returns
Example
Your business claimed ERC for the tax year 2021 and reduced the wage expense on the 2021 Income Tax Return. In 2024, the IRS sent a denial letter you do not challenge. You do not need to go back and amend the 2021 Income Tax Return. Instead, you can increase the wage expense on the 2024 Income Tax Return.
Please reference Section Income Tax & ERC, Q3 on the FAQ website.
Takeaways on the ERC Update
Did you claim ERC during 2020 & 2021? The IRS expects you to adjust your wage expense on your Income Tax Return when claiming ERC.
If you didn’t adjust your tax return, reporting the ERC as income in the year received may be an alternative solution.
If your ERC claim was denied, you may be able to restore your wage expense deduction on a future return.
Staying compliant with these rules helps avoid penalties and ensures accurate tax filings. If you have any questions about the ERC update, please contact our expert, Taylor Van Slyck, for further assistance.
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