In 2020, the government responded to the COVID-19 pandemic by passing the CARES Act, which included a refundable tax credit known as the Employee Retention Credit (ERC). This credit enabled qualifying businesses to stay afloat or compensate for the lost revenue during those affected periods.
Qualifying businesses include those that:
Were ordered to shut down due to government COVID restrictions.
Suffered a significant decline in gross receipts.
Were recognized as a recovery startup business during the applicable period of the pandemic.
However, there was a long delay between filing the ERC claim and receiving the funds from the IRS. This caused many businesses to overlook a component of the ERC process: amending tax returns to account for the credit received.
If your business received the ERC, you must report this credit as income based on the payroll period during which you made the claim. Depending on the payroll tax periods for which you filed amended payroll returns, you would need to amend your 2020 and/or 2021 tax returns to account for the added income. Failure to do so could result in penalties and interest.
Why Do I Have to File an Amended Return?
The IRS considers the receipt of the ERC to be a reduction of the business’ deductible wages for the period in which the ERC was claimed (If you amend your Form 941 for the 3rd quarter of 2021, then you need to amend the income tax return that covers the 3rd quarter of 2021). The business must reduce its amount of deductible wages by the amount of the credit, which in turn results in an increase to taxable income. Subsequently, in most instances, this means your tax obligations also increase.
Unlike funds received from the Payroll Protection Program (PPP and PPP2), which were considered to be tax-exempt income to the taxpayer, the funds received from the ERC program will affect taxable income at the federal tax level.
You’ll also need to review your state’s laws to see how your state treats the ERC. Minnesota and Wisconsin, for example, will not include your federal ERC adjustment in state taxable income. They will allow for a subtraction to income to bring the taxpayer’s taxable income back to the pre-ERC adjustment level.
How Long Do I Have to File an Amended Return?
The date by which you must file your amended return depends on when you filed your 2020 and/or 2021 returns originally:
Businesses and organizations that received a credit for the 2020 tax year must file an amended return by March 15 or April 15, 2024, if they filed their returns timely.
For credits received for the 2021 tax periods, the deadline for filing is March 15 or April 15, 2025, if they filed their returns timely.
If your business filed an extension, then you have up to three years from the original filing date to file a timely amended return. If an extended return was filed on May 17th, 2021, then the three-year statute will end on May 17th, 2024.
Missing the deadline or “strategically” letting the statute of limitations run on the return may open up the possibilities of accuracy-related penalties (20% of tax adjustment) and interest charges.
What Do I Have to Do?
If the firm that prepares your tax return prepared your ERC refund, they should already be in the process of handling amended returns. All you need to do is ask them to check on the status of your amended filing.
If your usual tax preparer was not the firm you engaged to file for the ERC refund(s), you will need to inform your usual preparer of the need to amend 2020 and/or 2021 returns.
What Does Your Preparer Need to Do?
The Employee Retention Credit has been a source of a large number of fraudulent claims with the IRS. Because of this, the IRS froze the processing of ERC claims on September 14th, 2023 and did not open up the process again until January 1, 2024. As a result of these fraudulent claims, the IRS is also asking tax preparers to verify that the business qualified for the credit in the first place.
Once verified, the process of amending your tax filings depends on your specific business and personal tax filings:
In most cases, there’s only one number on the business’s return that needs to be adjusted.
If your business taxes flow into your personal taxes, your preparer will need to amend both the business and personal returns.
In some cases, there may be more complex issues to deal with if there are basis limitations, suspended losses or the partnership/LLC is subject to special CPAR rules.
This is not an exhaustive list, but it brings to light the fact that not all adjustments are created equal. It’s important to work closely with your tax preparer to ensure that all relevant regulations are followed in a timely manner.
Get Help with Your ERC and Tax Amendment Needs
The deadline to amend your income tax returns to accurately reflect the Employee Retention Credit is near. If you take proactive steps to address the issue now, you can save yourself and your business from potential IRS problems. Contact us so we can help you ensure that your returns are properly amended.