As a California-based recipient of Employment Retention Tax Credit funds, there are important tax aspects you should be aware of:
- There are no California state tax consequences, only federal. Employers in other states should check with their tax preparer to determine any ERTC-related state tax consequences.
- Your ERTC refund is subject to the IRS expense disallowance rules. Basically, this means a reduction to the deductible wage expenses in the year that the wages were paid that give rise to the credit. Meaning a 2020 ERTC claim would be reflected on a 2020 Federal Income Tax Return. This is likely to have your tax CPA indicating you should amend your tax return and that may result in an increase in your income for that year, meaning that you may owe more in taxes*. Alternatively, if you experienced a loss in that year, it may decrease your loss. You should discuss amending your returns with your tax preparer.
*In April 2022, the IRS advised that taxpayers may be eligible for relief from penalties for failing to pay their taxes relating to the ERTC, if they can show reasonable cause and not willful neglect for failure to pay. This is important as many employers did not apply for and receive ERTC funds until after their taxes were filed for the year for which the credit was received.
The IRS expense disallowance rules can be confusing, and as noted above, can change your tax liability for the year that your credit was based. PBO Advisory Group’s professionals can assist you in organizing and preparing the information you will need to present to your income tax preparer regarding your ERTC funds as well as all other financial aspects of your business. (Please note that we do not offer traditional income tax preparation services.)
As year-end nears, PBO Advisory Group can also assist in finalizing your year-end financial data, reporting, etc. Remember, tax planning for 2022 must be completed and implemented by December 31, 2022 and please make sure to check that your California Elective Pass-Through tax payments are estimated and topped up prior to 12/31/2022 especially if you report on a cash basis.
PBO ADVISORY GROUP ACCOUNTING SERVICES
We provide outsourced accounting services that leverage your internal team, while we handle your important financial challenges, deadlines, and more. Our services include:
- Cash flow planning, management, and forecasting
- Development and maintenance of revenue and expense budgets
- Preparation of financial and analytical statements
- Management of accounting and administration teams
- Interface with executive team, board of directors, general counsel, auditors, bankers, and investors
- Development of financial controls to reduce risk
- Providing technical accounting support (lease accounting and revenue recognition)
- Assessing and deploying accounting and ERP solutions
- Accounting and finance assessments and redesign of people, process, and technology
- CFO services to support strategic initiatives
- Identifying and planning for capital investments
- Mergers and acquisitions support
For more information on the ERTC and its application to year-end financial data preparation, please contact Francesca San Diego.