Article | by Andrea Potter

The Employee Retention Credit (ERC), a relief measure introduced to assist businesses during the COVID-19 pandemic, has undergone significant revisions in its treatment with income tax, as outlined in new guidance issued by the Internal Revenue Service (IRS) on March 20, 2025. This article dives into the details of these changes and the implications for businesses.

The ERC was established to aid businesses affected by the pandemic, either through full or partial suspension of operations due to government orders or experiencing a substantial decline in gross receipts. The credit was available to eligible businesses from March 31, 2020, to September 30, 2021, with an extension until December 31, 2021, for recovery start-up businesses.

However, as the pandemic-era ERC approaches its expiration, the IRS has added five new frequently asked questions (FAQs) to address the treatment of the credit on tax returns. These FAQs, though not authoritative guidance, offer clarity on various scenarios surrounding the tax implications of the ERC.

One of the crucial changes in the revised guidance pertains to how taxpayers report their ERC claims with regard to income tax. Previously, the IRS required taxpayers to report the ERC refund claim as a reduction in wage expense in the year the credit was earned. This meant taxpayers had to include the ERC refund amount in their taxable income, even if the refund was not yet received.

However, under the new FAQs, taxpayers who have not yet adjusted their wage expense for an ERC claim now have an additional option. They can now adjust their wage expense and include the ERC refund in taxable income in the tax year the refund is received. This shift provides a much-needed solution and eliminates the need for taxpayers to amend prior tax returns, thus averting potential complications with related IRS notices.

Another significant update addresses the scenario for taxpayers who had disallowed ERC refunds. Previously, if the IRS disallowed a claim, taxpayers had to amend their prior returns. With the new guidance, if a claim is disallowed, taxpayers can increase their wage expense in the year the disallowance is finalized, or alternatively, they may file an amended return.

These changes come with their own considerations. For instance, if a business underwent ownership changes since 2020 or 2021, determining when to recognize adjustments due to receipt or disallowance of an ERC claim needs a careful evaluation.

The new guidelines are a significant departure from previous IRS stances and present taxpayers with more flexibility in managing their ERC claims and the associated tax reporting. Despite this new guidance, nuances and timing issues around ERC claims and statutory deadlines still exist, requiring careful attention.

In conclusion, it’s crucial for businesses to understand these changes and their implications. It is recommended taxpayers speak with a tax professional to assist with navigating these new guidelines to ensure compliance.

Geffen Mesher’s team is available to assist you with questions related to these updated rules. Please contact Andrea Potter for more information at apotter@gmco.com.