IRS definition: A start-up recovery business is a business that started on or after Feb. 15, 2020.
Those businesses may still be eligible for employee retention credit (ERC) during the fourth quarter of 2021, whereas businesses that started prior to Feb. 15, 2020, cannot. Your ERC eligibility ends with the third quarter of 2021.
For most reading this, your company was in business before Feb. 15, 2020, and therefore, you may still be able to review 2020 and the first three quarters of 2021 for potential payroll tax credits. If you have not investigated your business’s potential eligibility or calculated the potentially available credit, I recommend you do. Seek the advice of your tax preparer. The amount of tax credit can be substantial.
If you do still want to pursue these or already have, there is new IRS guidance to consider.
In late 2021, the IRS issued guidance on when and how to include the employee retention credit claimed on the income tax return of the business claiming it. Therefore, amended business income tax returns may be necessary.
Details on guidance
Let us start with how to report the claimed amounts. The ERC amounts claimed should be reported as a reduction of the salaries and wages paid for the income tax year. This means that the wages and salaries reported on the return will be less than the gross amount paid.
The biggest impact of the new guidance is when the claimed amounts should be reported. According to the IRS, the amounts should be reported for the period in which the related salaries and wages were paid.
Perhaps an example will better illustrate what this may mean to your business. For this example, I assume the following:
- Business is a calendar-year income tax reporter.
- In this example three quarterly claims were filed.
- ERC claimed for the second quarter of 2020 on form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) in the amount of $10,000.
- ERC claimed for the third quarter of 2020 on form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) in the amount of $15,000.
- ERC claimed for the fourth quarter of 2020 on form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) in the amount of $35,000.
- Forms 941-X filed April 2022.
- ERC refund not yet received.
In this example, the 2020 business income tax return should be amended to reduce the reported salaries and wage expense by $60,000, regardless of whether the refund was received or remains due. This is the proper reporting regardless of the method of accounting chosen by the business for income tax reporting.
Please check with your tax preparer to see how this might affect your business and personal income tax returns.
This information is general in nature and is not intended as legal, accounting, or tax advice provided by BUSBooks LLC to the reader. This material may not apply to the reader’s specific circumstances and may require consideration of additional factors. BUSBooks LLC recommends that the reader contact a tax professional before taking any action based on this information. BUSBooks assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect this information.
UMA Member Tracy Fickett, CPA, operates BUSBooks, a specialty accounting firm dedicated to the motorcoach industry. If you have a question, you can reach her at firstname.lastname@example.org.
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