Yes, Employer, ERC Tax Credits are Taxable

Throughout 2020 and 2021 we’ve encouraged our business clients to take advantage of the Employee Retention Credit (ERC) that was first introduced in the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act and further modified in the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. We assisted dozens of clients in realizing benefits from this program, but now that we are past the December 31, 2021 deadline to claim an ERC credit, all attention is now on the tax status of these funds.

The IRS has determined ERC funds are not to be included in an employer’s gross income, rather the credit is subject to “expense disallowance rules.” This means an employer’s wage deduction should be reduced by the amount of the ERC, resulting in a smaller wage expense and essentially rendering the credit taxable.

For businesses who received an ERC in 2021, as indicated above, the IRS has mandated that the amount received from your ERC be a reduction from your expenses, thereby increasing your taxable income. We are reminding all clients who received an ERC to prepare for this impact as they begin tax preparations.

For businesses that received an ERC in 2020, the regulations indicate that the same rules will apply. We are uncertain if the IRS will provide additional guidance, as this could require numerous amended tax returns.

The ERC program provided welcome relief to a number of businesses, but the tax ramifications are complicated. As always, please contact Cray Kaiser at 630-935-4900 for assistance in understanding your specific situation.

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