S-Corp with ERC for 2021

[peggysioux]

I have a cash-basis S-Corp that filed amended 2021 941 to obtain ERC for which IRS has not yet issued refund. S-Corp books show a debit to ERC receivable and a credit to ERC expense. Within tax return, wages have been reduced by the ERC for Federal and an adjustment in CA to include the ERC wages as a deduction. However, the balance sheet in tax return is off by the amount of the ERC Receivable. If I make an M-1 adjustment showing the ERC as tax exempt income, all is well, everything balances. However, being the ERC refund was not received in 2021, I don’t think I should be reporting the ERC as tax exempt income in 2021. Would anyone have any suggestions on what adjustment should be made so that all balances on tax return or as to what I might be doing incorrectly?

Any help is greatly appreciated.

PeggySioux

[Maribeth]

It's all reported in 2021, even with a cash basis taxpayer. If I'm following your booked journal entries correctly, you should show the credit due on the balance sheet. And your M-1 entry is a reduction in wages reported per books versus wages per tax return.

[peggysioux]

Maribeth, my understanding is that the tax-exempt income should not be reported in 2021 if refund was not received in 2021. Do you have information that leads you to believe otherwise? The credit is listed on balance sheet as a receivable and I do show an M-1 entry as a reduction of wages; however, Schedule L of 1120-S will not balance (off by the receivable amount). If I make an M-1 adjustment for income recorded on books this year not included on Schedule K, then all balances on Schedule L and the Schedule L matches S-Corp balance sheet.

Peggy Sioux

[Maribeth]

The information is in Notice 2021-49. I was so glad when I did my final corporate return with ERC and I swore I was never going back to the madness of PPP's and ERC's and those 2 years of chaos. If I am remembering correctly how we handled the journal entries, we debited payroll taxes payable by the amount of the credit, which would be your debit to a/r. We then credited, using a contra account, Salaries & Wages expense. So, since we actually booked the ERC Credit, there was no M-1 adjustment. At least I think that's what we did. We carried the credit allowed to the income statement for books and that was the same amount for tax. It's not tax-exempt income, it's a tax credit allowed, and wages need to be adjusted accordingly. If I am way off on this, I can check with my associate who is the true payroll expert in this office and she can clear it up for us, in the morning. I am not technologically-advanced enough to figure out how to upload the notice for you, but here's the link

https://www.irs.gov/newsroom/treasury-irs-provide-additional-guidance-to-employers-claiming-the-employee-retention-credit-including-for-the-third-and-fourth-quarters-of-2021