With tax return filing approaching for many clients, this is a reminder that IRS guidance provides that employers may not deduct wages that were used in the ERC calculation from taxable income up to the amount of the ERC.
The IRS issued Notice 2021-49 N-2021-49 (irs.gov) indicating an employer who deducted wages that were also the basis of an ERC claim must adjust income in the year the wages were paid, not the year the law was enacted or the refund claim was filed or when the refund is/will be received. Therefore, if an employer files a refund claim for an ERC for a quarter in 2020, then according to the IRS the adjustment to taxable income equal to the ERC must also be included on its 2020 federal income tax return, even if that refund claim is filed in 2021 or later.
According to the IRS guidance, amended returns will be necessary for businesses that didn’t include adjustments on their 2020 and/or 2021 income tax returns.
Please consult your tax advisor for guidance on the required adjustments to taxable income and the timing of the adjustments due to this IRS Notice.
Since there is no ERC benefit for state tax purposes, generally there should not be a wage add-back when computing state income taxes. See for example, California guidance that the adjustment to income does not apply ERC refunds are not taxable income for California – Spidell (caltax.com). Please check with your tax advisor for your state tax treatment of the ERC wage adjustment.
We are available to provide refund details and/or participate in any discussions with you and your tax advisor.
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