Have you received a refund related to the ERC and are wondering how to record it on your books? According to the current IRS guidance, if the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. This would mean that if you received an ERC refund related to your 2020 wages, you would need to go back and amend your 2020 business tax return and any related 2020 individual income tax returns to record the credit in the correct period. This is true even if you receive the refund(s) in 2022, 2023, or 2024.

The IRS would assess penalties on the additional tax owed as a result of the amendment reducing the wage expense by the credit received, but penalty abatement can be granted for reasonable cause in this instance.

In terms of recording the refund check, we recommend creating an asset account called “ERC Receivable” where the funds can be recorded when they are deposited on the books. When the amended tax return is filed, there will be an entry that will record the receivable by debiting the ERC Receivable account and crediting the salaries and wages expense account.

If you think you might need to file an amended tax return and need assistance, contact our team of professionals.