The Employee Retention Credit (ERC) — famed for its cryptic and dynamic nature — has just been re-informed by new IRS guidance. Whereas most guidance intends to avoid confusion, IRS Notice 2021-49 seems to only create more concern around this lucrative COVID-19 relief benefit.
Summary & Background
The CARES Act of early 2020 disallowed “double-dipping” between COVID-19 relief funds, leaving loan and credit recipients to choose between the PPP and ERC. In late 2020, however, the passage of the CAA allowed businesses to retroactively utilize both the credit and the loan, so long as the monies were directed towards separate wages. Further guidance provided that wages covered by forgiven PPP loan money could not receive an ERC credit, continuing the anti-double-dip agenda.
After months, the constantly evolving guidance had finally come to a near conclusion, and a majority of small businesses proceeded to file their 2020 tax returns by the May 17 deadline this year.
The recent IRS notice, however, “re-clarifies” how to indicate ERC & PPP funds on 2020 tax returns, which isn’t too helpful for those who have already filed.
The guidance states that any business that received funds will need to reduce wage expenses by the amount of ERC money received on its 2020 tax return. An example from Accounting Today: “If you claimed $100 in wages and received $10 in credit, you have to go back to the return and reduce wages to $90.”
It sounds simple enough, and it’s even lucrative for small businesses looking to minimize their tax liability after such an economically unstable year. But for those who already filed for the 2020 tax year, the IRS requires returns to be amended to re-indicate credit amounts.
IRS Backlog
It’s not a smart move for an agency that’s already been struggling to file through returns and remains severely backlogged. As of July 31, the IRS still had 13.8 million individual tax returns remaining for processing, with millions of individuals calling daily for their refunds.
For paper-filed returns that claimed any amount of ERC funding, IRS processing is taking as long as 15 to 20 weeks.
Is There A Solution?
Frustrated taxpayers and preparers are at a loss on where to start. Fortunately, Congress’ House Ways and Means Committee has proposed a second option for taxpayers claiming ERC funds. Current guidance states that ERC funds must be reflected on the tax return of the year in which they were received (2020, for most); proposed guidance suggests the IRS allow taxpayers to include ERC refunds as income on 2021 returns.
Call your accountant at DSJ to learn more about your ERC and PPP loan filing options. Give us a call at 516-541-6549 and visit our website to stay up to date!