With the April 15 deadline looming for 2021 Employee Retention Credit (ERC) claims, the IRS has issued five new FAQs to clarify how the pandemic-era credit should be treated on income tax returns, especially amid timing and eligibility complications. 

As reported by Journal of Accountancy, the new guidance, released Mar. 20, provides important clarification for businesses grappling with expired statutes of limitations, amended returns and rejected claims.

April Walker, lead manager at AICPA & CIMA, highlighted the significance of the new FAQs on the Tax Section Odyssey podcast, noting that they answer persistent questions around filing complexities. 

Among the key points: taxpayers must reduce their wage expense deductions by the amount of any ERC they claimed, even if the credit is received in a later year. If a business failed to do so, the IRS says the overstated wage deduction must be recognized as income in the year the ERC refund is received.

Conversely, if an ERC claim is denied after the wage expense was reduced, businesses may increase that expense on the relevant return—potentially requiring amendments. 

The IRS also provides updated guidance on reporting suspected ERC fraud and reaffirmed that the credit does affect income tax filings. Though these FAQs are not authoritative, they give much-needed clarity as tax professionals and businesses finalize their filings.