Therefore, you will have to modify your tax return to apply for the ERC. You can't apply for the credit on your annual income tax return. Because the ERC is no longer available, the only way to apply for the credits you qualify for is to file an amended return using Form 941-X. The ERC expense denial uses § 280C, which covers refunds of tax credits and their relationship to expenses.
All salaries and health care expenses used for the ERC must be traced back to the year in which the deduction was claimed on an income tax return. FAQ 86 states that employers who receive a tax credit for eligible wages and health care expenses do not include the credit in their gross income for federal income tax. While the refund is not taxable under article 280C of the IRC, the amount of the credit creates a reduction in salary that matches the amount of the credit. However, the timing of this reduction was uncertain: will it be in the year in which the amounts were paid or in which the ERC request was filed? This often results in two different tax years.
The wage expenses and health insurance costs listed on the income tax return must be reduced by the amount of the ERC. While the actual credit will be reimbursed to the taxpayer, an important consideration when applying for the ERTC is that the credit is taxable in the year the salary was paid, not when the credit (money) was received. Refund tax credits can be higher than the payroll taxes paid and higher than what the company can receive in PPP loans. The Treasury and the IRS know that this situation may arise, in part, because of the IRS's delay in processing adjusted employment tax returns (for example, previous IRS guidelines stated that the employer should reduce their income tax deduction for ERC qualified wages by the amount of the ERC for the tax year in which those salaries were paid or incurred).
The IRS today issued a statement in response to taxpayer requests for penalty relief when additional income taxes are due because the deduction for qualified wages is reduced by the amount of an employee retention credit requested retroactively, but the taxpayer cannot pay additional income tax because the refund payment related to the employee retention credit has not yet been received. The best way to ensure that you receive all the credits you're eligible for is to contact a professional familiar with ERC tax returns. If a tax-exempt organization applied to the ERC for salaries paid for an unrelated business activity (UBI), it will be subject to the amended reporting requirement if it submitted its Form 990-T not including the ERC wage reduction. WASHINGTON The Department of the Treasury and the Internal Revenue Service have received requests from taxpayers and their advisors to exempt themselves from the penalties that result from owing additional income taxes, since the deduction for qualified wages is reduced by the amount of an employee retention tax credit (ERTC) requested retroactively, but the taxpayer cannot pay the additional income tax because the payment of the ERTC refund has not yet been received.
