By Michael A. DeHaven, CPA and Shareholder, Rainer & Company

If your business hasn’t received thousands of dollars in Employee Retention Tax Credits (ERCs), you’re not alone. Millions of businesses across the U.S. haven’t, and now the IRS is requesting they go back and amend their 2020 tax returns.

This places an enormous burden on many of the small- to mid-sized businesses that the ERC was intended to serve. It creates cash flow issues for business owners who will be required to pay the additional tax resulting from the amendment at a time when ERC refunds have been delayed due to IRS processing issues. Business owners will also incur professional fees to file the amendments. And if you’re in a partnership or S Corporation, these returns will need to be amended as well as the 2020 returns for each individual owner.

Rainer & Company is encountering this issue with many of the businesses we serve this tax season across the region, including the already beleaguered hospitality industry.

You may recall that the ERC initially allowed a 50% credit for wages paid for the second through fourth quarters of 2020, and then a 70% credit for wages paid for the first through third quarters of 2021, if the business either had its operations suspended due to COVID-19-related government orders or had a significant decline in gross receipts. Wages paid with a loan under the Paycheck Protection Program (PPP) were not eligible for the credit. The credit is applied to the employer’s payroll taxes, and if the credit exceeds the employer’s payroll taxes, the IRS refunds the difference.

The issue of amended 2020 returns for ERC applies to your business if:

  • You filed an amended 4th quarter 2020 Form 941s in 2021 to obtain the ERC.
  • You did not include the 2020 ERC income in your 2020 tax returns
  • IRS Notice 2021-49 requires taxpayers to file an amended tax return for any tax year where wages were deducted AND an Employer Retention Credit (ERC) related to these previously deducted wages was received in a subsequent year.

We are hopeful that the IRS will change this requirement and give taxpayers the option of recognizing the ERC in the year in which the credits are applied for or refunded.  There has been similar precedent with respect to PPP loans and other matters resulting from the CARES Act and Relief Act. In the meantime, if you have any questions, I invite you to reach out to me and the team at Rainer & Company at mdehaven@rainer.com or 610-353-4610.