The California Franchise Tax Board (FTB) has updated its stance on the treatment of the Employee Retention Credit (ERC). Previously, the FTB had stated that any refunds received through the ERC would be taxable for California income tax purposes, while the wages used to claim the credit would be deductible. However, after reviewing the relevant federal rules and guidelines, the FTB has now announced that ERC refunds received will not be taxable for California income tax purposes, and the wages used to claim the credit will remain deductible.
This change offers a double benefit to entities that have claimed the credit, as they can now receive the deduction and exclude the corresponding income as non-taxable.
Entities that have already filed an original or amended tax return reporting an ERC refund as taxable income should consider the benefits of filing an amended return to reflect the ERC refund as non-taxable.