In March, the IRS released new FAQs that cover the income tax reporting of Employee Retention Credit (ERC) claims. According to the IRS, taxpayers no longer need to amend a prior year’s income tax return to adjust the wage expense due to an ERC claim. Instead, taxpayers can report the adjustment as gross income on the income tax return in the year the ERC was received.

Before this guidance, practitioners followed IRC 280C(a), which required taxpayers to reduce their wage expense for any credits taken in the year the wage expense incurred. For example, for 2020 ERC, taxpayers needed to reduce the wage expense for 2020.

Additionally, under this new guidance, if the statute of limitations remains open, taxpayers can still amend a prior year tax return to reduce their wage expense by the amount of the ERC claimed, or they can include the ERC in gross income on the tax return when they receive the ERC.

Importantly, the IRS asserts that if the statute of limitations for amending a prior year return has closed and the taxpayer did not reduce their wage expense, they must claim the ERC as gross income in the year they received it. The IRS warns in the FAQs that if taxpayers do not recognize the ERC on a tax return, they “may be claiming an unwarranted double benefit.”

Lastly, the FAQs state that if the IRS disallows an ERC claim, taxpayers can increase their wage expense in the year the disallowance becomes final, after they have exhausted all efforts to receive their ERC claim.

Many taxpayers are still waiting ERC payments from the IRS. While amended returns are no longer necessary, KT recommends that taxpayers stay on top of their tax compliance to avoid adding an unnecessary hurdle to the ERC refund claim process. Taxpayers waiting for ERC processing should also continue to monitor their mail for refund checks or any related correspondence from the IRS.

If you have not received any notices related to a pending ERC claim, you may want to contact the IRS or have your KT Tax Advisor contact them to confirm they have your claim on file and get an update on its status.