I have a S corp with the employee retention credit. I entered the credit in Lacerte Screen 15 Ordinary Deductions "Less: employee retention credit". It is reducing the wage expense on page 1, line 8. But it is also coming in on page 3 Schedule K as a non-deductible expense. Therefore, the Balance Sheet shows Retained Earnings is reduced again. The net effect is like the credit is reducing income twice. What am I missing?
I haven't filed the return yet, but as of now I'm NOT entering it on the line in Lacerte for 'Less retention credit...' but instead reporting it on a separate line as a reduction of 'Salaries and Wages.' This avoids any M-1 adjustment.
Like you, I feel I'm missing something with this workaround and was hoping somebody would post a different solution.
I think this is an unforeseen issue that needs to be addressed by the service. If an 1120S there are also basis issues depending on the treatment. Could go with Congressional Intent idea since no item of basis should be affected by PPP - but what about ERC? Personally, I'm extending all returns with this issue.
"but what about ERC?"
It's a Wage Expense adjustment. It's not also on the balance sheet like PPP.
"If the corporation claims a credit for any wages paid or incurred, it may need to reduce the amounts on lines 7 and 8. See Reducing certain expenses for which credits are allowable, earlier. Also reduce the amounts reported on lines 7 and 8 by the nonrefundable and refundable portions of the new CARES Act employee retention credit claimed on the corporation's employment tax return(s)."
From the 1120S instructions.
Here are examples:
"Level Up" is a gaming function, not a real life function.
If it's an M-1 nondeductible expense adjustment, then nondeductible expenses historically reduce the tax basis in the entity. So if we reduce page 1 1120S wages, then also record as an M-1 adjustment, we've increased basis and reduced basis as a wash. Issue is business has more real cash from the credit, so if that is distributed we get an unintended basis reduction (ignoring all other basis adjustments) . Similar, but not equal to, PPP basis treatment if the "no item of basis shall be effected" language was not added in March.