This past spring, the IRS issued Notice 2021-49 regarding Employee Retention Tax Credits. According to the IRS, ERTC should be accounted for in the employers 2020 tax return, generally as a deduction of expense. This applies not only to accrual-based taxpayers, but also to cash-basis taxpayers. In this context, taxpayer includes pass-through entities.
As of August 15, however, few refunds for 2020 ERTC have been received. This can place a cash burden on the organization depending on the tax income of the entity prior to the inclusion of the credit amount. For example, an entity that had a “breakeven” tax income, before ERTC, and claimed $300,000 of 2020 ERTC would then have taxable income of $300,000, even though the $300,000 had not yet been collected.
PBO Advisory urges all employers who claimed 2020 tax credits to review this situation carefully with their tax advisors to determine the necessary next steps, especially if you have not yet filed your 2020 tax return.