Employee Retention Credit: Amend the Proper Return

The Employee Retention Credit (ERC) is a refundable pandemic-related tax credit for eligible employers who were fully or partially suspended due to a governmental order or who had a qualifying decline in gross receipts between March 2020 and September 2021 for comparable quarters. The credit may be claimed by filing an amended 941 for the quarter in which the business is eligible. For the 2020 credit, the deadline to amend is April 15, 2024. And for the 2021 credit, the deadline is April 15, 2025.

The IRS has intensified its focus on the Employee Retention Credit including increased inquiries and audits. Employers should be wary of ERC advertisements that advise them to apply for money by claiming the ERC when they may not qualify. AAFCPAs reminds clients of the critical importance of assessing and documenting eligibility prior to claiming the ERC. Learn more about who is an eligible employer.>>

AAFCPAs is advising clients of two major considerations related to tax filings when engaging in the ERC program. The first consideration is that the qualified wages used to claim the refundable tax credit are no longer allowed to be taken as a deduction on the income tax return. Next, tax returns should be amended for each year in which the ERC was taken in order to properly reflect adjusted taxable income. For example, if you are eligible to claim the credit in 2020 and 2021, both years of income tax returns must be amended.

The ERC is claimed by amending the 941 payroll filings. 941s have a statute of limitations of five years, while an income tax return has a statute of limitations of three years. If the IRS makes a determination to disallow the credit after the statute of limitations to amend an income tax return has passed, they could still audit the payroll filing and tax away the credit as well as assess additional interest and penalties.

As with all tax credits, there are significant rules and potential pitfalls. If you have questions, please contact Matthew Lougee, CPA, MSA, Tax Manager at 774.512.4195 or mlougee@nullaafcpa.com, or your AAFCPAs Partner.

About the Author

Matt provides proactive tax and business advisory services to private, closely-held businesses and their owners in a variety of industries, including: construction, manufacturing & distribution, and retail. He specializes in providing federal and state tax planning & compliance for C Corps, S Corps, partnerships & their owners. He has been a valued resource to clients advising on the implications of COVID-19 stimulus initiatives, including the tax effects of Paycheck Protection Program loans and Employee Retention Tax Credits.