When the regulations concerning the Employee Retention Credit (ERC) were first issued, they indicated that a taxpayer who received ERC credit was supposed to reduce their deductible wage expense in the tax year the wages were paid.
Many ERC claims, which could be taken for 2020 and 2021 wages, were filed after tax returns for those years had already been filed. This meant taxpayers had to amend their business tax returns for 2020 or 2021, even if they were not receiving the check for the credit until several years later. In the case of pass-through entities, this meant all the owners had to amend their personal returns as well.
Then, because of rampant fraud and ineligible claims, the IRS froze the processing of the ERC claims while they took a closer look at everything. Legitimate claims that were frozen during the moratorium are still being processed and paid.
To ease the administrative burden and added expense associated with amending several years’ worth of tax returns, the IRS now says that a taxpayer can simply recognize income in the year in which the payment is received instead of reducing the expense on an amended 2020 or 2021 tax return. Similarly, if a taxpayer did reduce wage expense in a prior year because of an anticipated ERC credit that is now denied, the taxpayer may claim additional wage expense in the year of the disallowance in lieu of filing an amended return to once again claim the wages in the year they were originally paid.
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