The IRS has issued new information on how businesses may handle wage adjustments for income tax purposes related to the Employee Retention Tax Credit (ERC). The information, released in the IRS’ FAQs, provides additional information on the timing and reporting of wage deductions when an ERC refund is received or denied.

Understanding the New IRS Information on ERC Wage Adjustments

1. Reducing Wage Deductions in the Year of the ERC Claim
Consistent with previous IRS instructions, the IRS reaffirmed that the proper approach for businesses claiming the ERC is to reduce the deduction for wages paid in the tax year related to the credit. This guidance remains consistent with previous IRS instructions.

2. Handling ERC Refunds Received in a Later Year
A key update in the FAQs addresses companies that did not initially reduce their wage deduction in the tax year the ERC claim pertains to but later received an ERC refund. Instead of requiring an amended return or Administrative Adjustment Report (AAR), the IRS may allow businesses to apply the tax benefit rule, increasing their gross income in the year the refund is received to correct the previous overstated wage deduction.

3. Adjustments When an ERC Claim is Denied
The IRS also provides information for businesses whose ERC claims are denied after previously reducing their wage deductions. Companies in this situation have two options:

• File an amended return or AAR to adjust the original credit year.
• Use existing tax principles on unrealized expense reimbursements to increase the wage deduction in the tax year the claim is denied.

Key Considerations for Businesses

While the updated FAQs provide useful guidance, businesses should be aware that IRS FAQs do not hold the same legal authority as statutes, regulations, or court rulings. As a result, this information may change, and businesses should discuss potential risks with their tax advisors before relying on them for tax filing purposes.

If your company is affected by these updates, it’s essential to assess your tax strategy and compliance requirements. We can help you navigate these changes and determine the best approach for your specific situation.