What is New (as of March 20, 2025 IRS FAQ Updates):

1. Alternative Reconciliation Methods:The main change is the IRS providing new, alternative ways for businesses to handle discrepancies between their ERC claims and their income tax wage expense deductions, potentially avoiding the need to amend prior-year tax returns.
2. Scenario 1 Guidance (ERC Received, Wage Expense Not Reduced): Previously, if a business received an ERC payment but hadn't reduced its corresponding wage expense deduction on the relevant prior-year tax return, the standard procedure was to amend that prior return. The new guidance allows the business to instead include the ERC amount (the overstated wage expense) as gross income on the tax return for the year the ERC payment is received.
3. Scenario 2 Guidance (Wage Expense Reduced, ERC Denied): If a business reduced its wage expense deduction anticipating an ERC, but the claim was later disallowed, the prior approach often involved amending the original tax return to restore the deduction. The new guidance allows the business to instead increase its wage expense deduction on the tax return for the year the ERC disallowance becomes final

How it Affects Wages (from the Employer's Tax Deduction Viewpoint):

• Reduced Wage Expense Deduction: The fundamental rule remains: The amount of the ERC claimed reduces the amount of wage expense that an employer can deduct on their federal income tax return for the year the qualified wages were paid or incurred. This is because the ERC is considered a reimbursement for those wages, preventing a double tax benefit (both credit and full deduction).

• Timing of Adjustment:The new guidance primarily affects the timing and method of making the adjustment to the wage expense deduction on the tax return in the specific mismatch scenarios described above (receiving the credit later without prior deduction adjustment, or having the credit denied after adjusting the deduction). It allows these corrections to potentially be made on a currenttax return rather than requiring amendments to past returns.