The Employee Retention Credit for 2020 was a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer paid to employees.
In situations where tax credits are available, deductions on the return must be reduced by the amount of the credit taken to prevent double dipping. This is a non-issue when the credit is taken in the year in which the income tax return is prepared. For example, if a credit is taken in 2020 prior to the 2020 income tax return being filed, all adjustments will be made on the timely filed 2020 income tax return. However, if the credit is taken retrospectively, an amended income tax return must be filed to properly report the credit. This is the case with the Employee Retention Credit (ERC). In most cases, the ERC for calendar year 2020 was applied for after the filing of the 2020 income tax return.
As the ERC applications were being completed, via amended payroll reports for 2020, there was uncertainty on whether the IRS would require the taxpayer to amend previously filed income tax returns or allow an exception for the taxpayer to make any necessary adjustments on the 2021 income tax return. On August 4, 2021, the IRS issued Notice 2021-49, which clarified any uncertainty stating an amended tax return should be filed for the year in which the wages were paid “to correct any overstated deduction taken with respect to those same wages on the original federal tax return”. Thus, a taxpayer with an ERC for calendar year 2020 must file an amended income tax return for tax year 2020.
Immediately following the issuance of Notice 2021-49, The American Institute of Certified Public Accountants (AICPA) requested the IRS make an exception and allow any necessary adjustments to be made on the 2021 income tax return. We have been waiting for the IRS to respond to the AICPA’s request before moving forward with the preparation of amended tax returns. However, to date, the request has not been addressed. While there is still a small chance the AICPA’s request will be granted, we are preparing as if the IRS will completely ignore their request.
What does an amended return mean for you? For taxpayers that have received or are waiting to receive an Employee Retention Credit, the 2020 income tax return needs to be adjusted by reducing the deduction for payroll taxes paid by the amount of the credit received or expected to receive. Yes, the income on the income tax return will increase by the amount of the credit. This means amended K-1’s will be issued to the shareholders/partners which will require amended personal tax returns and will likely result in additional tax due for the respective year. If you have filed 2020 amended payroll reports but still have not received the employee retention credit, you will be required to reduce taxes paid in 2020 by the credit determined on the amended payroll reports for 2020.
If you would like for us to begin preparing your amended tax return(s), please contact us as soon as possible. You can also wait to see if the IRS eventually responds to the AICPA’s request allowing the adjustments to be made on the 2021 return. However, if you wait and the IRS doesn’t allow an exception, we will have to extend your corporate and personal income tax returns for 2021 as we will need time to prepare the 2020 amended tax returns first.