Although I've searched, I'm not finding any posts on the question of ERTC as it relates to amended tax returns. Apologies if this has already been covered on this forum. Through a third-party, client amended form 941 for two quarters in 2021 and one quarter in 2020 for ERTC and is waiting for his refunds which total over $300k. Based on my research, it appears that the 1120S and the 1040 (one shareholder) for both 2020 and 2021 will require amendment to adjust the wages and payroll tax reductions showing on the 941-X. The reduced expenses will result in increased profits and ultimately more tax on the 1040-X. I would think IRS and the state will penalize and charge interest to the client for late payment of the resulting tax due. I'm curious if any tax preparers on this forum have encountered this situation, and if so, what has been the fallout relating to penalties and interest. I have talked with another CPA firm whose policy is to NOT amended past returns but instead will report the 941-X refunds as 'Other Income' in the year the refunds are received. This policy does not appear to be in accordance with IRS guidance and sounds risky to me. Would be interested to know what other members of the forum have experienced or learned regarding this topic.
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Copied, pasted and got this...
Sorry, but the page you were trying to view does not exist.Comment
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Taxable credit
While the actual credit will be refunded to the taxpayer, one major consideration when applying for the ERTC is that the credit is taxable in the year the wages were paid, not when the credit (money) was received.
Phrased another way, if a taxpayer now submits Form 941X for a quarter in 2020, even if they don’t receive their credit check until fall 2022, they will need to amend their 2020 income tax return and increase taxable income. Non-profits may not need to amend. Mechanically, this works by reducing the wages deducted on the tax return by the amount of the credit. Similarly, if a taxpayer applies for the credit for a given quarter in 2021, the wages used to calculate the ERTCs are disallowed as a 2021 tax deduction.
Taxpayers applying for the 2021 Employee Retention Tax Credit might consider extending their 2021 tax return to allow time to recognize disallowed ERTC wages on an originally filed tax return; that’s to prevent the administrative hassle of filing a 2021 amended return for credits claimed post-return filing. For income tax extension purposes, a taxpayer may decide to factor in the estimated increase to taxable income (or decreased net operating losses) from the ERTC when calculating 2021 extensions.
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I copied and pasted the link into my browser bar and went right to the Barnes Dennig article. Also worked by clicking on the link. Florida_EA posted the relevant paragraphs above for you to read.Comment
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Basically it works as follows:
Suppose taxpayer is a calendar year S corporation. Taxpayer gets 1000 ERC tax credit in 2022 for payroll related to 2020 and 2021. Say 500 for each of those years. Then 2020 and 2021 would get amended. No balance sheet changes. Simply enter the adjustment as an adjustment for Salaries and the 500 will show as an M-1 adjustment increasing taxable income or decreasing the taxable loss.
Amend 2020 and 2021
Then for 2022 treat the receipt of cash as PPL tax exempt income
Hope this helpsComment
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