Is it this simple - Employee Rentention Credit?

[WITAXLADY]

so we have done the retention credit for the employer - so wages of $10,000

credit of $4,291 or so

so on the tax return - Exp - Wages of $10,000

Income of $4,291? to balance it out?

I cannot wrap my head around this.. as I am trying to get 6 of the S corps done this week and instead am working with about 125 C's and F's to get their March 9th applications in!!

 

thanking you in advance!

D from the great north woods of WI!!

 

[Lee B]

Copied from the Ernst & Young Website (Most detailed Article I could find):

https://taxnews.ey.com/news/2020-1774-employee-retention-credits-present-challenges

"On April 23, 2020, the staff of the Joint Committee on Taxation (JCT) published its description of the tax provisions of the CARES Act (JCT CARES Act Report).6 The description of the ERC in the JCT CARES Act Report indicates the JCT staff's view that the ERC itself is also taken into account for purposes of determining any amount allowable as a payroll tax deduction for federal income tax purposes.

For example, assume an employer pays $2,500 of qualified wages for the quarter and claims an employee retention credit of $1,250 for qualified wages paid during the quarter. The employer's resulting OASDI [Old Age Survivors Disability Insurance or "Social Security"] tax liability (under [IRC S]ection 3111(a)) for the quarter is $155. Under the provision [CARES Act Section 2301(e)], the employer reduces its payroll tax expense by $155 and may deduct only $1,405 of qualified wages148 (assuming such wages are not subject to capitalization).

[FN]148 $2,500 — ($1,250 - $155) = $1,4057

Based on our analysis of the statute and considering the information in the IRS ERC FAQs and JCT CARES Act Report, we believe that an employer must reduce its total deduction by the amount of the ERC in accordance with IRC Section 280C(a). An employer is not required to reduce its deduction for qualified wages in excess of the credit"

[GLJEANNE]

Ugh, I've been wrestling with this one.  Another accountant I know swears it was made non-taxable, that the Dec bill made all Covid credits, grants, etc non-taxable.  So they're balancing it to Addt'l Cap Paid In.  I can't find any reference for that, so I'm still thinking it a credit against Wage expense.

I would so love to be wrong on this one, I'd just like a cite.

[Lee B]

IRS EMPLOYER FAQS:

 

"Special Issues for Employers: Income and Deduction

85. Does the Employee Retention Credit reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return?

Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule.  

86. Does an Eligible Employer receiving an Employee Retention Credit for qualified wages need to include any portion of the credit in income?

No. An employer receiving a tax credit for qualified wages, including allocable qualified health plan expenses, does not include the credit in gross income for federal income tax purposes. Neither the portion of the credit that reduces the employer's applicable employment taxes, nor the refundable portion of the credit, is included in the employer's gross income."

My previous post and this post is the best guidance that I can find, since I may be doing several of these.

[GLJEANNE]

I agree, I haven't found anything more recent that says the Dec bill changed the taxable nature of it.

If we're wrong, at least our way will mean a refund, not an extra tax bill.

[Medlin Software, Dennis]

I just noticed a new IRS draft form 5884-A.  Not my area of expertise, but this may be important.

https://www.irs.gov/pub/irs-dft/f5884a--dft.pdf

[Lee B]

IRS Notice 2021-23 providing guidance for 1st & 2nd quarter 2021  has been released