The IRS seems to be ramping up its processing of Employee Retention Credit (ERC) claims and has been issuing refunds in recent months. While the flow of funds may be welcome news to taxpayers, the receipt of the refund requires a review of the income tax treatment.
Tax Treatment of Received Claims
The original guidance provided by the IRS was that any wages used for the ERC claims were not deductible in the year the claim related to. This would, in many cases, have required an amended income tax return to be filed for 2020 or 2021; however, in March 2025, the IRS updated its frequently asked questions on ERC. Taxpayers who did not adjust wage expense in 2020 or 2021 and subsequently received a refund for an ERC claim should now include the refund in income when it is received. Any interest received as part of an ERC refund should be treated as taxable in the year received, regardless of the year the wage deduction was disallowed.
The treatment of ERC for state tax purposes would vary by state. Generally, New Jersey follows the Federal treatment and would not allow a deduction of wages pertaining to an ERC claim in the year the wages were paid. New Jersey has not provided specific instructions related to the recent IRS updated guidance, but hopefully, it will continue to follow the IRS treatment.
Denied Claims
The IRS continues to be concerned that ERC claims may have been filed erroneously. The IRS has the ability to claw back any ERC refund after if it is paid if the claim is determined to be invalid. The statute of limitations for review of the claims can, in some cases, be as long as 6 years from the date the refund is received. In cases of fraud, there is no statute of limitations so that the IRS could review these claims indefinitely.
The IRS updated guidance also allows taxpayers to deduct additional wage expense in the year an ERC claim is denied if the taxpayer disallowed wages originally on its 2020 or 2021 return related to an ERC claim.
The fact that the IRS has recently increased payments of ERC claims is welcome news to many taxpayers who have been waiting for refunds for, in some cases, years. However, the issuance of these refunds can create additional complexity. It’s important to discuss any refund received or claim denials with your tax advisor.
Please contact your WG advisor with any questions or additional information about the information in this article.
