written by Phil Williams
The IRS has recently provided long-awaited guidance on a pressing issue in Employee Retention Credit (ERC) claims. To fully grasp the issue and the proposed solution, let’s revisit notice 2021-20 from March 2021, where the IRS first discussed the treatment of deductions related to ERC. Section F of the notice states the following:
“Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Code apply for purposes of the employee retention credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages or salaries paid or incurred equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance applies under section 2301(e) of the CARES Act with regard to the employee retention credit, such that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit.”
What this essentially means is that there is no double benefit related to the credits. If you claim a credit, you have to make a reduction of qualified wages equal to the amount of the credit itself. Initially, the IRS required adjustments to be made when filing for the ERC, even before receiving the credits, and in the tax year the wages were paid. For the majority of taxpayers claiming this credit, this meant that an amendment was required.
If credits were being paid out timely, this wouldn’t be a big problem as the resulting income tax due could be paid relatively quickly from the proceeds. Unfortunately, that wasn’t the case as we saw claims take 6, 12 and in rare cases 24 months or more to process. The IRS knew they were behind on processing and issued IR-2022-89 that effectively stated if you made an amendment before credits are received, you could delay payment until the credits were received without facing penalty.
This update eased taxpayers’ concerns about making early amendments. As time passed and fraudulent filings increased, the IRS instituted a moratorium on processing all new claims beginning September 15, 2023. This created new fears as taxpayers wondered what would happen if a claim was disallowed after an amendment was made and statute passed? This question came up many times with taxpayers as we approached the March 15 and April 15, 2024 deadlines to amend 2020 returns to make a claim. Taxpayers (and their CPA’s) did not want to take on the risk of being unable to undo an amendment that was only made to account for the credits and have no way to recapture those deductions in the event a claim wasn’t ultimately processed and paid.
Fast forward to today, as we approach the 2021 filing deadline and the moratorium is partially lifted, disallowances are going out in waves, and we still had no answers until the IRS finally released guidance March 20, 2025. With that, there are plenty of taxpayers that fall into the both of the scenarios discussed with complex issues that have come to light as the result of this FAQ.
Taxpayers who didn’t reduce their wage expense, whose ERC claim was allowed now have a method to make the reduction. IRS guidance states:
“You should address your overstated wage expense. Under these facts, you’re not required to file an amended return or, if applicable, an administrative adjustment request (AAR) to address the overstated wage expense. Instead, you include the overstated wage expense amount as gross income on your income tax return for the tax year when you received the ERC.”
This is a huge win for taxpayers as it removes a large administrative burden tied to the claims and also gives a method for those who were too fearful of claims being rejected or not paid to make the requisite adjustment. This is also an unspoken win for the IRS to make sure that there is no reason for taxpayers not to adjust just because the statute of limitations to amend has passed, helping eliminate any option for a taxpayer to not account for the credit when received.
They also address what to do if a taxpayer’s ERC claim was disallowed and the taxpayer had already reduced the wage expense on the income tax return by the amount of ERC. The guidance states “you may, in the year your claim disallowance is final (meaning you are not contesting the disallowance or you have exhausted your remedies to argue against the disallowance), increase your wage expense on your income tax return by the same amount that it was reduced when you made your claim. Alternatively, you may, but are not required to, file an amended return, AAR, or protective claim for refund to deduct your wage expense for the year in which the ERC was claimed.”
This is again a win for taxpayers who were led to believe that they were qualified by ERC promoters when no such qualification existed, and only after the statute of limitations had expired had their claim disallowed. This now allows them to recapture their expense beyond the statute of limitations so as to avoid the doubled impact of the claim disallowance and the deduction offset. Additionally, removing the need for amending simplifies the process with less administrative burden.
Although this is an overwhelming win for the majority of taxpayers and their tax preparers, it is unfair treatment for taxpayers who already worked to file the right way and had to pay interest or penalties if unable to have them waived. There are also some unique cases such as when taxpayers filed a final return before receiving the ERC payment, which is now out of statute, and how to address the credits.
This long-awaited IRS guidance is a significant win for taxpayers and their advisors. It addresses two of the most pressing and persistent issues surrounding ERC wage deductions and disallowed claims, providing much-needed clarity and easing the administrative burden for many. At Tri-Merit, we understand how complex and nuanced ERC compliance has become—especially as deadlines approach and new scenarios continue to emerge.
We remain committed to supporting CPAs and businesses through every step of the process. If you have questions about how this guidance applies to your clients or need help navigating ERC compliance, our team is here to help. Reach out today to learn how we can be your trusted resource in maximizing tax credits while staying compliant with evolving IRS guidance.
