The IRS giveth, the IRS taketh away
Few taxpayers understand that if they received an Employee Retention Credit, they must reduce their wage related expenses by the amount of the credit. To make matters worse, the IRS has decreed that taxpayers must reduce their wage expenses in the year the wages were incurred that generated the Employee Retention Credit not in the year the credit was received. Since the IRS has taken so long to refund these credit amounts, the wages usually must be reduced in a year before the credit or refund was issued. For example, (for even cash basis taxpayers), many taxpayers must reduce their wage related expenses in 2021 for refunds or credits they received in 2022.
The horrific result is that many business taxpayers must amend their 2021 tax returns. Individuals that are shareholders of S-Corporations that received the ERC may also have to amend their 2021 tax returns. At a time when the IRS is already extraordinarily slow in processing returns, they will now get an influx of amended returns to process. In addition, interest and penalties may be assessed against these taxpayers. Too bad Congress is more interested in conducting political investigations that have no legal bearing rather than helping their constituents out of this ridiculous dilemma that they created.