Dixon Hughes Goodman is requesting tax payment relief from the IRS for businesses that are eligible for 2020 employee retention credits for which the tax refunds haven’t yet been received.
Taxpayers who claim the ERC are required to reduce their otherwise deductible qualified wages by the amount of ERC credit claimed, but that could cause problems for many businesses.
The employee retention credit was one of the provisions of the CARES Act passed by Congress in March 2020 aimed at getting relief to small businesses during the COVID-19 pandemic. While it didn’t get as much attention at the time, the Consolidated Appropriations Act that Congress passed last December enabled businesses to take advantage of both programs and accounting firms have been helping their clients navigate the complexities this tax season.
“Due to the wage deduction disallowance associated with employee retention credits (ERC), many taxpayers who were prohibited from claiming 2020 credits during 2020 will be required to pay additional tax despite not yet having received the refunds associated with these credits,” wrote DHG tax managing partner Trey Ackerman and tax partner Heather Alley in their March 26 letter. “Further, this required payment will occur at a time when many employers’ cash reserves are both depleted and desperately needed to resume full operations as the economy begins to improve. Taxpayers who are unable to make this payment or are unable to accurately estimate the wage disallowance may also find themselves subjected to late payment penalties.”
If the request is granted, DHG would like the IRS to disregard the failure to pay penalty for one year from the otherwise applicable statutory due date. That would enable taxpayers who are still evaluating qualification or have not yet quantified their ERC more time to calculate any ERC and submit refund claims before they have to pay the taxes associated with the wage reduction. That would also allow taxpayers who lack the cash right now to pay the extra taxes more time to receive their refunds before they have to pay the associated tax increase.
“The employee retention credit is determined based on a percent of wages, and there is a rule — and other employment type credits usually have a similar rule — that basically prevents double dipping,” Alley toldAccounting Today. “You take the credit on the wages, but you’re not allowed to take the deduction for the wages you determine the credit on, so if you claim $10,000 of employee retention credit, then when you do your income tax returns, you would adjust your wage deduction expense to disallow $10,000 of wage reductions. What happens is since there wasn’t really a lot of guidance yet on the ERC and businesses were very busy having to deal with all of these other things with the pandemic, they had not yet had a chance to go through in 2020 and determine eligibility and determine what those amounts were and apply them.”
Then in late December, thanks to the Consolidated Appropriations Act, Congress allowed businesses that had received Paycheck Protection Program loans to be eligible for employee retention credits as well. Previously they hadn’t been eligible for both programs.
“What we have right now is a lot of taxpayers that are going through making sure they are eligible and computing amounts of 2020 credits that they’re eligible for and submitting amended 941’s to claim refunds,” said Alley. “The ERC was made a payroll tax credit in order to get funds into people’s hands quickly and also to make sure that so they could receive the funds even if they didn’t have an income tax liability for the year. But what’s happening since it’s not an income tax credit that’s claimed on the same return as the wage adjustment goes on, now we have taxpayers who need to make in April or May, depending on whether it’s a C corp or an individual tax payment for 2020, and they need to adjust their wage deduction because of the employee retention credits that they’re going to claim.”
However, they’re not likely to see those refunds for a while. “Those are ones they need to finish and the IRS will obviously take some amount of time to process those and then issue the refunds back to them,” said Alley. “The unintended result could require a taxpayer to come up with out-of-pocket cash right now to make an additional income tax payment, and then have to wait to get their refund back. We submitted a letter to the IRS requesting that they allow people subject to this wage adjustment an additional 12 months without failure to pay penalties to pay in their tax liability to the extent it’s related to this wage adjustment. That would allow people time to prepare their amended 941’s, submit them and hopefully get the refunds in hand before they need to make that additional income tax payment.”