On Thursday, March 20, the IRS updated its “Frequently asked questions about the Employee Retention Credit (ERC)” (FAQs), offering relief to many taxpayers who claimed the ERC and who have not accounted for the impact of their ERC claim on their income tax return. Specifically, the IRS added a new section to the FAQs titled “Income Tax and ERC” and updated an FAQ for each of the categories “Claiming the ERC” and “ERC Scams” on topics including timing of income tax adjustments attributable to the ERC and amended returns.
As background, ERC claimants are required to reduce wage expense related to qualified wages on which the ERC was claimed. The wage expense reduction is required under the tax benefit rule, which disallows a double benefit for both a wage expense deduction and a credit based on the same wages paid. Originally, the reduction was required to be made for the tax year in which the qualified wages were paid or incurred (see Notice 2021-49). For example, the wage expense on a 2021 tax return would need to be reduced for a 2021 ERC claim. Taxpayers who did not reduce wages for the applicable tax year on an originally filed tax return were previously required to file an amended tax return or an administrative adjustment request (AAR) to properly reduce qualified wages for such year.
In a change of prior policy, under the new guidance, taxpayers are no longer required to amend their returns. Instead, the overstated wage expense can be recognized as gross income in the tax year the ERC is received. Furthermore, the updated FAQs provide for instances when an ERC claim is denied after a taxpayer has already reduced their wage expense for the tax year the qualified wages were paid. In this situation, a taxpayer may increase their wage expense relative to the disallowed ERC in its current return filing. Rather than filing an amended tax return, AAR, or filing a protective claim for refund applicable to the tax year in which the qualified wages were paid, a taxpayer may now deduct the increased wage expense in the year the ERC claim disallowance is final. Note that a taxpayer may still wish to amend its prior year returns to recover the previously reduced deduction.
This represents a significant change in policy and effectively ends the IRS’ position than an amended tax return or an AAR is required to reduce qualified wages for the tax year on which the ERC was claimed.
The “ERC Scams” section was updated to refine information about reporting potential fraud. This suggests that while the IRS may be removing some obstacles to taxpayers implementing the ERC, it is still intent of pursuing bad actors that filed or promoted the filing of improper ERC claims.
How Forvis Mazars Can Help
To better understand how this change may impact you and your business, contact a professional at Forvis Mazars today.