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2020 Tax Return and the ERC Wage Adjustment
In order to ensure taxpayers do not receive a double tax benefit with respect to the same expenditure, businesses claiming credits that are determined with respect to wages are, generally, required to reduce their income tax deduction for wages by the amount of the credit taken. This general rule is applicable to businesses who claim the employee retention credit (ERC). As a result, businesses who are claiming 2020 employee retention credits will be required to reduce their qualifying wages by the amount of the credit when computing their income tax liability.
Absent additional guidance from the IRS providing otherwise, the wage adjustment for ERC is applicable to the taxpayer's income tax return which includes the quarters for which the credits are claimed. For example, a calendar year business would need to reduce its 2020 wage expense deduction by the amount of ERC claimed on 2020 qualifying wages. This presents a current cash flow concern for a lot of taxpayers.
Many businesses who are eligible for 2020 ERC have not yet received the cash benefits of these credits. In some cases, the businesses may still be in the process of evaluating eligibility and quantifying the credit amounts. Meanwhile, the income tax payment deadline for 2020 calendar year taxpayers is April 15 for C corporations or May 17 for most pass-through business owners. While extensions may be filed to allow additional time for computing and reporting the adjustment, an extension does not allow additional time for payment of the income tax liability.
DHG has written a letter to the IRS and Treasury requesting additional time for taxpayers to make payment of their 2020 income tax liability associated with this wage adjustment. Under the DHG request, taxpayers would have an additional 12 months to collect their ERC related refunds and pay the income tax without any late payment penalties and associated collection actions.
In the event relief is not provided, various approaches may be taken to address the cash flow issue created by the 2020 wage adjustment. Your specific facts and circumstances will determine which approach is best suited for you.