For tax-exempt organizations that follow generally accepted accounting principles (GAAP), the ERC is typically reported as contribution revenue rather than a reduction to wage expense. Tax-exempt organizations generally follow the method of accounting used on their books and records. The wage expense and health insurance costs on the income tax return must be reduced by the amount of the ERC. For calendar year C-corporations, the extended due date is October 15, 2021. For calendar year end partnerships and S-corporations, the extended due date is September 15, 2021. Finalize any 2020 employee retention credit calculations before the tax return is due.
If your 2020 income tax return has not been filed yet, you are in luck.
Employers Who Have Not Yet Filed a 2020 Tax Return This option is only available for partnership tax return filers and is a way to avoid having each underlying partner or member file an amended tax return. This is the year which the wage disallowance applies.Īn alternative option for filing an amended income tax return is filing an Administrative Adjustment Request. Any wages and health care expenses utilized for the ERC must be traced back to the year which a deduction was claimed on an income tax return. The IRS is applying a tracing requirement for the wages. If your 2020 income tax return was already filed but did not include the wage disallowance for 2020 ERC claims, an amended income tax return may be required. Employers Who Already Filed a 2020 Tax Return Employers must reduce their wage expense in the year which the wages were paid or incurred.
The IRS answered this question in Notice 2021-49. However, the timing of this reduction was uncertain – is it in the year the amounts were paid or the year which the ERC claim is filed? Often, this results in two different tax years. In FAQs issued by the IRS in 2020 and reiterated earlier this year in Notice 2021-20, employers that claim an ERC must reduce their wage expense and health plan expenses (if appliable) on their income tax returns by the employee retention credit amount. One aspect relates to the timing of the wage disallowance for ERC claims. The IRS recently released Notice 2021-49, providing long awaited guidance on many aspects of the Employee Retention Credit (ERC).
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