NEWSLETTERS

IRS Issues New ERC FAQs: What It Means for Your 2020 & 2021 Tax Returns

March 24, 2025

On March 20, 2025, the IRS released new FAQs addressing income tax treatment for Employee Retention Credit (ERC) claims, offering much needed clarity for businesses that claimed the credit for tax years 2020 or 2021.

As a reminder, the IRS required businesses that claimed the ERC to reduce their wage expense deduction by the amount of the credit for the corresponding tax year.

Example: If a business entity claimed a $50,000 credit for 2020, it was required to reduce its 2020 payroll expense deductions by $50,000.

However, due to significant delays in IRS processing, many businesses are now dealing with one of two common situations:

Scenario 1 – Deduction Was Not Reduced

The business entity chose to delay filing amended returns to reduce its deductions, pending receipt of the ERC refund.

  • 2020 ERC Claim – The deadline to amend 2020 income tax returns has passed. Some businesses are now receiving ERC refunds but did not reduce wage expenses on their 2020 returns.
  • 2021 ERC Claim – Amended income tax returns can still be filed for 2021 if submitted by the later of:
  • Three years from the original due date, or
  • Three years from the date the return was actually filed.

New IRS Guidance – Q&A 2 (March 20, 2025)

If a business receives an ERC refund but did not reduce wage expenses in the year the credit was claimed, it does not need to amend the prior income tax return. Instead, it should include the ERC refund amount as gross income on its tax return for the year the refund is received.

GPW Insight:

For businesses that chose to wait, there is no need to scramble to amend 2021 returns at the last minute. If you claimed the ERC in 2020 or 2021 but didn’t reduce deductions, you can include the refund as income in the year it is received (e.g., 2024, 2025, or later).

Scenario 2 – Deduction Was Reduced, but ERC Was Denied

The business entity already reduced its wage deduction in anticipation of receiving the ERC, but the claim has since been (or could potentially still be) disallowed.

  • 2020 ERC Claim – The deadline to amend 2020 income tax returns has passed. It is too late to file another amended return to reverse the reduction of payroll deductions.
  • 2021 ERC Claim – The due date for filing an amended 2021 tax return expires in 2025, and the entity needs to make a decision soon whether to file another amended return to increase payroll deductions.

New IRS Guidance – Q&A 3 (March 20, 2025)

If the business already decreased wage expenses on the 2020 or 2021 tax return to correspond with ERC claims filed, it is not necessary to amend the prior year’s income tax return. Instead, the business entity may increase wage expense deductions in the tax year when the disallowance becomes final.

GPW Insight:

Entities concerned that they may never receive their ERC refunds, still need to wait for correspondence from the IRS indicating their claim has been denied. If they receive such correspondence, they can challenge the denial and provide additional information to support their claim. However, if the claim is ultimately denied, they can increase wage expenses on their tax return in the year of disallowance.

Filing Amended Returns

Despite the new IRS guidance permitting the inclusion of income (Q&A 2) or adjustment of expenses (Q&A 3) in the current year, where the due date has not yet passed, business entities still have the option to file an amended return, to either correctly report the ERC adjustment (if not previously reported), or to reverse the previously included ERC adjustment. 

GPW Insight:

Though filing amended returns is still an option, business entities that already reduced expenses and are still awaiting the refund should be wary of filing an amended return in order to obtain a refund of the previously paid tax. While not explicitly stated by the IRS, filing an amended return now that effectively reverses the ERC claim, with the thought that if an ERC refund is eventually received it can be reported again later, could be viewed as a sign that the entity does not stand by its ERC claim. This might increase the chances that the IRS deny the ERC claim.

GPW Insight:

If a passthrough entity is considering filing an amended return, it should also factor in the impact on the partners / shareholders as any amendment would require the partners / shareholders to also file amended returns.  The Q&A guidance allows for a more streamlined method of reporting ERC related adjustments that does not require amended returns and therefore decreases the administrative burden on both the entity and related partners / shareholders. As a result, in most cases we would recommend relying on the methods provided by the Q&As.

If you have any questions or would like to discuss your options to determine the best course of action, please don’t hesitate to contact our special project team at spteam@gpw.cpa.

Gatto, Pope & Walwick, LLP
Certified Public Accountants