Credit Controversy
Recently, there has been much controversy surrounding the Employee Retention Credit, more specifically, when the credits will be received and when that income will be taxed, among other issues. Although there was plenty of backlash from the accounting community, the IRS has recently doubled down on its position on Notice 2021-49.
Timing
Those who claimed the Employee Retention Credit for years 2020 and 2021 have been waiting on receipt of credit payments for some time now, with the IRS stating that these refunds will not come until early 2022. Furthermore, the IRS has instructed taxpayers to file amended 2020 tax returns – both business and corresponding individual returns, remitting the tax due on this income regardless of the fact that the actual credits might not be paid out until 2022, and regardless of whether the taxpayer is on a cash or accrual basis.
QBI
The IRS further requires that the receipt of the credit will result in a reduction of the wage expense, not as additional income. Why does this matter? Because, reducing the wage expenses also reduces the QBI eligible wages, which could potentially reduce the QBI deduction.
Wrap-Up
The IRS Notice is very clear that taxpayers should amend tax returns corresponding to the year in which the credit was claimed. Talk within the industry has suggested that some taxpayers are not amending the 2020 return until the credit is actually received. Additionally, for 2021, many taxpayers may choose to extend their 2021 returns in anticipation of receiving the refund before filing. Both of these options are not within the guidance from the IRS Notice and would be considered timing differences, resulting in potential interest and penalties. As always, please contact our office to discuss your particular circumstances so we can properly advise you.
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