Income Tax Impact of ERTCPublished:
If you requested and received the Employee Retention Tax Credit, there are income tax consequences for your business and/or individual return. The credit is a reduction of wage expenses for the year in which the payroll was paid or incurred; therefore, it may require you to file amended returns.
In this video, I’m going to cover the impact on income taxes from requesting and receiving the Employee Retention Credit, which is distinct from the payroll tax implications.
So, if you have applied and received the Employee Retention Credit, then you may be familiar with the process, which is that you requested the credit on either an original or amended payroll tax return. The most common scenario is that it was an amended tax return, because the credit was retroactively allowed to be taken alongside PPP.
However, what you may not be as familiar with is the income tax implications. Intuitively, it makes sense that the credit may be taxable in the year that the cash is received, especially given the processing delays of the IRS, however that is not the case. So let’s quickly cover this so that you know what to expect and what needs to be done once you receive your Employee Retention Credit refund from the IRS.
So, as an overview, this is a straightforward and short explanation, but not commonly known because it’s not necessarily what you would expect. The income tax impact of the Employee Retention Credit is that the deduction for wages is reduced by the credit. This is the equivalent to the Credit being directly subject to income tax. However, because it is a disallowed expense, the income tax is in the year that the wages were paid or incurred.
So, let’s go over an example. In 2022, you request the ERTC on 2020 and 2021 payroll tax returns. And then, in 2023, your returns process, and you receive that refund. But in this example, the tax is not assessed on your 2023 income tax return. Instead, you are going to then amend your 2020 and 2021 income tax returns to reduce the wage expense claimed, which in turn will increase your taxable income.
And I want to point out two important conclusions from this video. The first is that the tax treatment will not happen automatically; you will have to approve and sign off on the filing of amended returns, so we will try to reach out to you if we are aware of your ERTC filing, but if you don’t hear from us, then you should let us know if your return needs to be amended due to receiving the ERTC. And the second is that there will be interest generated by the IRS on any balance that becomes due as a result of the income tax amendment, which will depend on your business’ tax situation for that year and can vary. And if you want to wait to amend until you receive the actual cash refund, even if you recently expect to receive it, then in many situations you can still choose to pre-pay the IRS for that year in anticipation of owing an additional balance soon.
And as always, we are working very hard to keep you up to date and make sure you’re receiving as much value as possible. Hopefully this video gives you a clear idea of what to expect on receiving your ERTC refund.