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lacerte tax

aeh-cpa
Level 2

Preparing an S Corp return with employee retention credit.  My balance sheet is off by exactly the amount of the credit.  What am I missing?  I entered the ERC amount in the field labelled "Less employee retention credit claimed on the employment tax return".  Not sure if it matters but the credit was an actual refund not just reduction in payroll tax deposit.

Also, how should I handle 4th quarter ERC that was claimed on the Form 941 but refund not yet received?

Thank you.

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27 Replies 27
sjrcpa
Level 15
Which balance sheet account is wrong? Is there an M-1 adjustment for the ERC?

ex-AllStar
aeh-cpa
Level 2

It's the retained earnings.  Yes, there is an M-1 adjustment.  The net income per books does not match QuickBooks balance sheet.  It's off by the ERC.

TaxMom12
Level 3

@aeh-cpa I'm experiencing the same issue.  My net income per books on the M-1 Line 1 does not match.  It's reduced by the credit.  The only other solutions is to either reduce wages (don't want to do that, then wont tie to W3) or do another M-1 adjustment in addition to the specific sick and family credit input field.  

Have you determined anything new since you posted this last week?

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aeh-cpa
Level 2

I have not yet been able to find the answer.  No one else has responded to my issue.  I also sent a service request through Lacerte on Saturday 02/06/21 but have yet to get a response.

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sjrcpa
Level 15

Wages to the extent of the credit are not deductible. This is an M-1 item - deduction on books not on tax return.


ex-AllStar
itonewbie
Level 15

Agree with Susan.  See Sec. 2301(e) of the CARES Act about the applicability of IRC Sec. 280C(a) and the explanation in the JCT report, which includes the following example:

If a taxpayer claims a credit under this provision, rules similar to the rules of sections 51(i)(1) and 280C(a) apply. Thus, for example, an employee retention credit may not be generated by an individual employer hiring his or her children. In addition, the credit is taken into account for purposes of determining any amount allowable as a payroll tax deduction or deduction for qualified wages (or any amount capitalizable to basis). For example, assume an employer pays $2,500 of qualified wages for the quarter and claims an employee retention credit of $1,250 for qualified wages paid during the quarter. The employer’s resulting OASDI tax liability (under section 3111(a)) for the quarter is $155. Under the provision, the employer reduces its payroll tax expense by $155 and may deduct only $1,405 of qualified wages (assuming such wages are not subject to capitalization).

Footnote: $2,500 – ($1,250 - $155) = $1,405.

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Still an AllStar
aeh-cpa
Level 2

I agree that the wage deduction is supposed to be reduced.  I believe the problem I'm having might be due to the fact that the client received a refund of the credit amount.  Should I enter the deposit as a reduction of wages and ignore ERC input field or enter the deposit as other income?

Also, how are you handling any ERC claimed on 4th quarter Form 941?  I have clients that did not reduce payroll tax deposits and instead will be getting a refund for the ERC in 2021.  Should this be recorded on the books as of 12/31/20?

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TaxMom12
Level 3

I don't disagree that the wage expense should be reduced by the credit.  My issue remains with my NI per books on line 1 of the M1.  The books show actual wages paid and then other income to recognize the credit (net result is a reduced expense).  When I enter actual wage paid and then Lacertes input field for sick and family leave credit it does not increase my net income (like normal "other income"), it only creates an M1 adjustment with no retained earnings impact. 

@aeh-cpa - I don't think the refund would effect your situation because it would show as balance sheet overpayment, right? The nuts and bolts and impact to your wage expense has already occurred.  

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TaxMom12
Level 3

To conclude: my question is the Lacerte input, not the tax effect necessarily.  

aeh-cpa
Level 2

That is my problem as well.  If I just manually adjust the salaries and wages field in Lacerte vs. entering the ERC in the specific input field, my balance sheet balances.  NI and retained earnings per books agree but no M-1 adjustment shows on return.

The only other work around I have found is to use the ERC input field and enter "income recorded on books not included on Schedule K" equal to the ERC but that seems wrong.

TaxMom12
Level 3

I'm with you..... I don't want to alter my actual wages paid (which ties to W3) in addition would then have to override QBI wages (or should it?). I don't know, everyone seems to be content with how it's reporting.  

Your proposed work around is the only thing that works even when it seems wrong. The objective is then accomplished.  M-1, line 2 and 5 wipe each other out which is fine because the taxable income is correct. 

Thank you! 

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CHRIS CPA
Level 1

Partner and I went back and forth on this yesterday for close to an hour. Nice of Lacerte to try to manage the mechanics of the ERC but I do believe it is wrong. I do not believe there should be a M-2 line 5 decrease by the amount of the ERC. Hoping LAcerte does an update on this and corrects this and basis schedule

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qbteachmt
Level 15

I know we covered this on the forum already. Did everyone miss the Instructions in 1120S:

Line 7. Compensation of Officers and Line 8. Salaries and Wages

 

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Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation..

 

Enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation. The corporation determines who is an officer under the laws of the state where it is incorporated.

Enter on line 8 the total salaries and wages paid or incurred to employees (other than officers) during the tax year.

 

 

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).

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"Level Up" is a gaming function, not a real life function.
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aeh-cpa
Level 2

I agree that wages should be reduced.  It was more a matter of how to make it work in Lacerte.  What I'm finding is that if I don't use the Lacerte input field but manually adjust the wages myself, everything balances and there is no M-1 adjustment.

Thanks to everyone.

CHRIS CPA
Level 1

Easy part is wages get reduced. We are working through the mechanics of the balance sheet and M-1, M-2 Lacerte is making assumptions on. I think there will be an update soon and we will get some help on it. 

qbteachmt
Level 15

"What I'm finding is that if I don't use the Lacerte input field but manually adjust the wages myself, everything balances and there is no M-1 adjustment."

Exactly. Enter the Reduced amount, and it flows accordingly. It is not a further Adjustment. It's almost like a direct Rebate.

"We are working through the mechanics of the balance sheet and M-1, M-2 Lacerte is making assumptions on"

Then something else likely is off. This is not treated the same as PPP/EIDL loan forgiveness.

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"Level Up" is a gaming function, not a real life function.
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Bob CPA-39 TS
Level 1

You are exactly correct the ERC input should not be mapped to the M-2 as a reduction.

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amec
Level 3

So, keeping this simple -

A taxpayer with $200,000 in wages takes an employee retention credit of $10,000 on his payroll tax return. Payroll taxes without taking into consideration the credit are $30,000.

But, because of the credit, payroll tax expense is only $20,000?

And the deductible wages (after the M-1) is $190,000?

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tk
Level 1

I agree that the Lacerte input is not working correctly.  It is assuming that you did not receive the refund yet.  The question that I have is do you record a "receivable" for the amount the ERC not received yet.  I think you do.  This is FAQ from the IRS.  Lacerte needs to fix the entry.  As far as the EIDL Grant and the subsidies from the SBA we beleive these are income not recorded on the tax return and for a S Corp enter on the M2.  Thoughts?

  1. Does the Employee Retention Credit reduce the expenses that an Eligible Employer could otherwise deduct on its federal income tax return?

Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule.  

 

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DME-CPA
Level 2

Has anyone figured out how to key this into Lacerte properly? Or is everyone just ignoring the box under Salaries and wages where you are supposed to enter the employee retention credit amount? I have the same problem many of you described in the 1120S module.

My client has wages of $487,000. Client is eligible for $25,000 ERTC, which we have amended 941 for. I recorded an entry to the books to debit a receivable and credit Salaries Expense. Now my books show total wages of $462,000. In Lacerte, I put $487,000 in the Salaries and wages box and $25,000 in the Less: employee retention credit box. Line 8 of 1120S correctly shows wages of $462,000. However, M-1 line 1 does not tie to book income. Instead of showing a loss of $160,000, it shows a loss of $185,000 because it isn't taking into consideration the fact that I have already reduced wages in the books by $25,000. Instead, it has an addback on line 3 for "Wages/Costs for Employment Credits" of $25,000. 

What am I missing here? As others have said, if I ignore the box that says Less: employee retention credit and don't put anything there and instead just key $462,000 as Salaries and wages, then the numbers on the 1120S, Balance Sheet, and M-1 all make sense to me. So is Lacerte not handling this right, or am I missing an entry somewhere?

aeh-cpa
Level 2

I just entered the reduced amount in Salaries and Wages box.  I ignored the Less: ERC box.

tk
Level 1

Agree reduce the wage manually.  I am still wondering about the timing?  Anyone else have this question.  There is no guidance. I think it should be done it on the 2020 return regardless of when the money comes from the IRS?

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Stimey
Level 2

Once again, lacerte trying to be cute; the way the system handles these ERC -  does not make ERC available for Income Distribution - Ignore this crap - on the salaries and wages input line - do a drop down ....and list gross salaries and the next line enter the ERC as a negative . At least this way - the system will print supporting documentation for the IRS. 

 

 

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Acct007
Level 1

The problem with this is that it will mess around with anything related to the state that might be different.  For example, in California, the wages offset by the ERTC are added back in on the CA return and reduces CA taxable income.  This really is a major problem, I hope Lacerte gets it together.

 

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KennethS
Employee
Employee

Sorry I may have missed the service request back in February.  It looks like our All Stars have handled the tax aspects wonderfully. On a technical note we do make an automatic adjustment on the M-1 as a default.  This can be changed on a per return or all return basis. Per return we can override the adjustment in the balance sheet miscellaneous screen. The field is labeled Schedule M-1 adjustments for refundable employment tax return credits: 1=yes, 2=no [O]. An entry of 2 here would suppress the automatic adjustment on the M-1. To change this globally for all return go to settings then options. On the tax return tab then federal tax options there is a similar heading Schedule M-1 adjustments for refundable employment tax return credits. If the drop down is yes the M-1 adjustment will be made, if it is no the M-1 adjustment will not be automatic.

TRegen
Level 1

What about CA?  A "no" entry in the override fixes the federal return but CA is still out of balance. 

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SBTS
Level 3

CA is still out of balance, any solutions?  Hoping Lacerte will publish a solution since it has been pending since  Feb and the filing deadline is in next 7 days!!

 

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