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IRS Issues Updated ERC Guidance as Statute of Limitations Nears Expiration

IRS Issues Updated ERC Guidance as Statute of Limitations Nears Expiration

On March 20, 2025, the Internal Revenue Service (IRS) added five new answers to frequently asked questions (FAQs) regarding the Employee Retention Credit (ERC). These answers provide guidance on how to handle the pandemic-era credit on tax returns under various scenarios, since the statute of limitations is set to expire on April 15, 2025. For businesses that believe they qualify for filing a 2021 ERC claim, the deadline to submit a claim via Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, is April 15, 2025.

The ERC was created during the COVID-19 pandemic to help businesses continue to pay their employees while their operations were either fully or partially suspended due to a government order. The credit was also aimed at helping businesses that had a significant decline in gross receipts during specified eligibility periods throughout the pandemic. The credit was available to eligible businesses from March 31, 2020, to September 30, 2021. For recovery startup businesses, the credit was available until December 21, 2021. Recovery startup businesses are businesses or organizations that began carrying on a trade or business after February 15, 2020, and had average annual gross receipts of $1 million or less for the three years preceding the quarter for which they are claiming the ERC.

 Below are the FAQs that were recently added to the IRS website:

1. Does the ERC affect a taxpayer’s income tax return?

Yes. The amount of the ERC a taxpayer receives reduces the wage expenses that can be deducted on the income tax return for the year in which the qualified wages were paid or incurred.

Most taxpayers deduct wage expenses on their income tax returns, while some must capitalize these expenses as part of the basis of a specific asset or as an inventory cost.  

2. Should taxpayers have reduced their wage expense on their income tax return when they filed for the ERC?

Yes. The amount of the ERC reduces the wage expense reported on the income tax return for the tax year in which the qualified wages were paid or incurred. Generally, a taxpayer cannot deduct an expense as an ordinary and necessary business expense if they had a right or reasonable expectation of reimbursement at the time the expense was paid or incurred.

Taxpayers who are eligible for the ERC have a right or reasonable expectation of reimbursement for qualified wage expenses, up to the amount of the ERC. For additional information, see IRS Notice 2021-20.

3.  A taxpayer claimed the ERC but did not reduce the wage expenses on their income tax return. The ERC claim was paid in a subsequent year. What do I do?

If a taxpayer did not amend their return, they can include the overstated wage expense as gross income on the income tax return for the year in which the ERC was received. For example, if the taxpayer received the ERC in 2024, then they can include it in gross income on the 2024 return If the refund was issued in 2025, they can include it on their 2025 return.

If a taxpayer capitalized wages or did not experience a reduction in tax liability for the overstated wage expense, they may not need to include the overstated wage expense amount in gross income on the income tax return for the tax year in which they received the ERC. Instead, they may need to make other adjustments, such as a reduction in basis for capitalized wages.

4.  What can taxpayers do if their ERC claim was disallowed and already reduced their wage expense on their income tax return by the amount of ERC they expected?

When the disallowance of the ERC claim is final, meaning the taxpayer is either not contesting the disallowance or has exhausted all remedies to argue against disallowance, the taxpayer can increase the wage expense on the income tax return in the year the claim is disallowed. For instance, if the disallowance was settled in 2024, then the taxpayer’s 2024 business return should reflect that. If the taxpayer did not extend filing their 2024 return, then they will likely need to amend the return.

Taxpayers can visit the IRS FAQs page for more information on the ERC. If you need to speak to a tax professional regarding the ERC, please contact a Brown Plus team member today.

Posted In: Tax | Insights

About the Author - Randy Fackler, CPA, CEPA, MST

Randy is a Principal and the Tax Director at Brown Plus and is one of the key members of the Firm’s Tax Department. As Tax Director and Principal, Randy is responsible for managing tax consulting and compliance services for his clients, as well as overseeing the Brown Plus Tax Department.

Randy has over 30 years of experience in public accounting and working with clients in numerous industries including manufacturing and distribution, retail, healthcare, professional services and high-net-worth individuals. He assists clients with general business advisory services such as tax accounting methods, tax planning and consulting, cash flow needs analysis, merger and acquisition analysis, product profitability analysis, forecasting and more.

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