When covid hit in 2020, the government created a unique scheme called the Employee Retention Credit, or ERC. That was a significant boost for a lot of firms that were seeking to keep these employees as well as employees because it meant they'd get paid. But one thing was unclear from the start: if I received free money, when do I have to disclose it as taxable income?
Many people were unaware that they should be asking that question. They viewed it as free money from the government that was not subject to taxation.
We are starting to see a lot of clients coming to us with their 2020 tax returns to create a plan for them, either because their CPA never told them that when they received their 2020 ERC credit, they were supposed to report it as taxable income and amend their 2020 tax returns to report it as income, or because their CPA never told them that when they received their 2020 ERC credit, they were supposed to report it as income and amend their 2020 tax returns to report it as income.
It was beneficial to participate in the ERC program. If you paid your employees' salary, the government would credit you up to $5000 per employee per year. That's $100,000 in free money if you have 20 employees. Nothing is ever completely free. The way the government wrote the original documentation for this was that yeah, we'll give you credit, but we don't know when you'll get it. Basically, businesses across the country had to file a modified 941X payrollform with the IRS to request these money.
Some businesses submitted the 941X, while others submitted an advanced credit application. It all depends on the form you filled out when you got the money.
On the other hand, as part of COvid 2018, 2019, and 2020, the IRS also produced material with new guidelines stating that if you incurred losses during those years, you may actually apply all the way back up to 5 years. So from 2018 to 2013, 2020 to 2015, and truly apply those losses and receive refunds. I'm hoping you can see how this will all come together.
If you received an ERC 2020 credit but did not receive the cash until 2021, you have no idea how much money you will receive, how much taxes will be, or what your actual dollar amount will be. You know what you applied for but not how much you will receive. As a cash-basis taxpayer, you don't know how much money you'll get until you actually get it. There are business owners that have not received ERC funds as of 2022.
Those receiving the funds will need to go back to their 2020 tax forms and update them.
If you took losses in 2020 and brought them back to 2015, you may need to adjust 2015, 2016, 2017, and all five years in which you carried your loss backwards.
We've seen that many people are unaware of this. Their CPA never informed them of this, their CPA never informed them of this, and their CPA never instructed them to report the ERC credit as income. In fact, the ERC credit was recorded as income by the CPA in 2020, minimizing the risk of a loss that you have been experiencing.
So this is one area where I strongly advise you to consult with your CPA. Find out what they've done, because many clients will say yeah, CPA, you can do whatever you want, I'll sign it, and I trust you. In this situation, you already know what will happen when you return.
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CEO & Tax Strategist - SaveOnTaxBill