Impact of refunds of ERC on Prior Tax Returns

The amount of the employee retention credit (ERC) reduces the amount of wages. But employers receiving a refund of the ERC don’t have to amend old returns and reduce the deduction for wages related to the credit. Instead, the IRS says to report the credit as income on the return for the year in which the refund is received. The IRS gives this example: Business A claimed an ERC of $700 based on $1,000 of qualified wages paid for tax year 2021 but did not reduce its deduction for wages in its income tax return for 2021. The IRS paid the claim to Business A in 2024, so Business A received the benefit of the ERC but hasn’t resolved its overstated wage expense on its income tax return. Business A does not need to amend its income tax return for tax year 2021. Instead, it should account for the overstated deduction by including the $700 in gross income on its 2024 income tax return. #IdeaoftheDay

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