Therefore, you will have to modify your tax return to apply for the ERC. According to the IRS, employers can still apply for the Employee Retention Credit (ERC) by filing amended employment tax returns, even though the coronavirus pandemic (COVID-19) era tax credit intended to help employers and employees during the health crisis expired last year. 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. Therefore, if an employer currently discovers that it was eligible for the ERC when the credit was available, it would file a Form 941-X to declare the overpayment of payroll taxes and, ultimately, apply for the ERC after its end date.
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. This is because the opportunity to modify payroll tax overpayments has not yet expired relative to the period of time the ERC was available. You don't enter the credit that reduces applicable labor taxes to the employer or include the refundable part of the credit. 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.
Calculating the ERC requires using the qualified salaries that the company pays to employees during eligible employer status. Even if your company participates in the Paycheck Protection Program (PPP), it may be eligible to receive the ERC. The wage expenses and health insurance costs listed on the income tax return must be reduced by the amount of the ERC. Taxpayers who applied for ERC retroactively and filed a modified income tax return to reduce their deduction for qualifying ERC wages paid or incurred in the tax year for which the ERC is requested have a higher income tax liability, but may not yet have received their refund from the ERC.
An alternative option for filing an amended income tax return is to file an administrative adjustment request. 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. Previous IRS guidelines stated that employers should reduce their income tax deduction for ERC qualified wages by the ERC amount for the tax year in which those salaries were paid or incurred. 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.
This option is only available to those who file corporate tax returns and is a way to prevent each partner or underlying member from filing a modified tax return.