IRS Issues New FAQs on Wage Adjustments to Income Related to ERC Claims

The Internal Revenue Service has recently updated its Frequently Asked Questions (FAQs) regarding the Employee Retention Credit (ERC), providing important clarification on when taxpayers should make adjustments to wage expense on their income tax returns following ERC claim determinations.

Timing Flexibility for Wage Expense Adjustments

Under the newly updated guidance, taxpayers who filed ERC claims now have flexibility in the timing of required wage expense adjustments. Specifically, taxpayers may now make the adjustment to wage expense on their income tax return in the tax year in which the credit is either allowed or denied.

This represents a significant clarification for businesses navigating the complex ERC landscape, particularly with the statute of limitations already passed for 2020 and quickly approaching for 2021.

Background on Wage Deduction Limitation

The ERC provisions require taxpayers to reduce their wage deduction on their income tax return by the amount of the ERC. This no “double benefit” rule ensures that businesses don’t receive both a tax credit and a deduction for the same wages.

Practical Implications

The updated FAQ guidance provides taxpayers with clearer direction on compliance requirements:

• For allowed claims: Taxpayers may reduce wage expense in the tax year in which the ERC is/was received, if they had not already done so on their 2020 or 2021 income tax return.
• For denied claims: No wage adjustment is necessary if the claim is/was denied in full.
• For denied claims where the adjustment was made on a 2020 or 2021 return: Wage expense may be increased in the tax year the disallowance is final.
• For partial denials: Wage adjustments should reflect only the approved portion of the claim.

If you have any questions on what this might mean for your business, please reach out to our team of CPAs and attorneys.