What’s the impact of the 2020 Employee Retention Tax Credit (ERTC) on income tax filings? According to the newest guidance from the IRS, it could be quite substantial for some filers. The current IRS guidance states that if a taxpayer has a 2020 ERTC credit, then the wages on the 2020 income tax return must be reduced by the amount of the credit.

Employer match exceptions

It’s important to note that the employer match of the Federal Insurance Contributions Act (FICA) and Medicare are not adjusted – only the gross payroll should be adjusted.

M-1 adjustments

If 2020 wages have not been reduced for Generally Accepted Accounting Principles (GAAP) or book purposes, there would be an unfavorable M-1 adjustment on the 2020 return to reduce the wages and record an ERTC Refund Receivable (and this is likely the case for many organizations). When the ERTC refund is received on the books in 2021, there will be a favorable M-1 adjustment, since the wages were reduced previously on the 2020 return (a timing difference between the two years, as the tax impact is being recognized in 2020).

Note that there are two methods for recognizing the ERTC for book: You can either reduce the wages, or record other income.

What to do if you applied for the 2020 ERTC

If you applied for the 2020 ERTC credit, the IRS’s position is that this must be reflected on the 2020 return. However, know that with all things related to the massive amount of COVID-19 legislation, the IRS guidance may change.

The American Institute of Certified Public Accountants (AICPA) and industry groups are pushing back on the IRS in regards to amending 2020 income tax returns – so you may want to hold off on amending your tax return for now. But, if the guidance doesn’t change and you have the ERTC credit for 2020, you will be required to file an amended return.

We’re here to help

Have a question about the ERTC for 2020 or 2021, or other pandemic-related legislation and how it may affect your organization, contact Barnes Dennig – our COVID-19 Advisory Team is here to help. You can also take our 3-minute ERTC Quick Tests to see if there are other potential benefits you may be missing.

Barnes Dennig COVID-19 Advisory Team