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Where do you input Employee Retention Credit adjustment for California S Corp tax return?

KEO
Level 2

Since California allows full wages deduction, my federal and California S Corp tax returns income differ. Lacerte does give a diagnostic for federal M-2 which gives the choice to remove the federal M-2 adjustment.  But my California balance sheet does not balance by the exact amount of the ERC - retained earnings specifically.  Where do I input the California adjustment?

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14 Comments 14
mhkdgal
Level 4

If you have entered the reduction in wages on Screen 15 in the field that says "Less: employee retention credit claimed on employment tax returns", then the CA adjustment automatically shows up as an "Other deduction" on line 12 of the CA 100S.

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qbteachmt
Level 15

I wanted to make sure this is not a mix up: "Since California allows full wages deduction"

Because you put ERC in the title here.

ERC = employer Tax provision

PPP = wage allowance program

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mhkdgal
Level 4

I thought the OP was referring to having received ERC credits which reduced wage expenses on the Federal return.  But, since there is no wage expense reduction for CA related to ERC credit, I understood the question to be about where to put the adjustment in Lacerte to allow full wage deduction for CA.    I might have misunderstood the original question!

 

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qbteachmt
Level 15

PPP reduces wage.

ERC is a Tax refund or credit for employer Tax. Not wages.

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qbteachmt
Level 15

This might help: ERC is part of Payroll reporting (941 and 7200). PPP is entity tax return (1120S, 1065, etc).

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mhkdgal
Level 4

Thank you for clarifying! 

I am worried I have been thinking of the employee retention credit all wrong now!   

My client filed amended 941-s for 2020 to claim the employee retention credits (they had not previously done so for 2020).  They are going to be receiving a large refund from the IRS as a result of the amended 941s.   I thought we had to go back and amend the 2020 1120-S income tax return and reduce the amount of wages deducted on the return by the amount of the employee retention credit that is being refunded.

Am I wrong?   Thanks for your help!

 

 

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qbteachmt
Level 15

Do you have this bookmarked?

https://gpwcpas.com/grant-credit-loan-and-other-relief-comparison-chart/

Although it has been updated for the recent SB change, they forgot to change the date at the top. That's the biggest issue right now, when using web resources, because so mane changes are happening so fast, and what you read might be superseded while you are reading it (ha ha ha).

ERC for CA: "The refund is taxable for California and the expenses are deductible."

So I don't know that you need to amend anything. Just report the refund as business income when the banking happens, for a cash basis entity. An accrual basis entity would have accrued the refund. If you got it as a credit, you were allowed to retain amounts collected from employees as advance payment for the employer tax credit.

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mhkdgal
Level 4

Thank you!   I did not have that bookmarked.   But, I totally agree.  I am wary of what I read online because I have seen so many outdated postings, etc.

Thank you for your willingness to help answer so many questions!  

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KEO
Level 2

First, thank you for your replies.

My question was about ERC and the Lacerte tax program.   In S Corp Lacerte, ERC amount is input in Screen 15 in Salary Wages input area "less employee retention credit claimed on employment tax return" which will reduce wages on the Federal return but not CA return.  Then in screen 30 input no in the section that says "schedule M1 adjustment for refundable employment tax returns."  My solution for CA balance sheet to balance was to input the amount of the ERC in screen 32 M2 area  for state only "amount of other additions to carry to schedule L"

Please don't quote another CPAs website as tax law source.  I could not find anywhere on Cal FTB website where it stated that ERC was taxable income in California.  If you are sure that ERC is taxable income in California, please reference the CA FTB law that states this.  There are plenty of other CPA websites on the internet that state ERC is not taxable income in CA and wages are fully deductible.  

Straight from California FTB website

California does not conform to the new federal employee retention credit or to existing federal general business credit provisions. Wage deductions that were disallowed under federal law as a result of claiming the federal ERC are allowed as a deduction for California.

https://www.ftb.ca.gov/about-ftb/data-reports-plans/Summary-of-Federal-Income-Tax-Changes/index.html

 

 

qbteachmt
Level 15

Here is your Lacerte help article:

https://proconnect.intuit.com/community/taxation/help/entering-the-employee-retention-credit/00/1217...

"Please don't quote another CPAs website as tax law source."

It's not offered as Law; it's a web Reference, with text content and links. It includes the direct links. I am very careful about sourcing, as you see in my comments about Dates. I use that table as reference only after confirming via other means. That's why I know it is current to the recent SB change for SVOG, even though the date at the top still is May 2021.

"I could not find anywhere on Cal FTB website where it stated that ERC was taxable income in California. If you are sure that ERC is taxable income in California, please reference the CA FTB law that states this."

Are you sure this isn't Semantics vs Mechanics? Taxable income by Expense Disallowance.

First, it's typically the other way around; you would need to prove grants and/or business income is not taxable. Example from Form 100 instructions for Line 15:

"Small Business COVID-19 Relief Grant Program. California allows an exclusion from gross income for grant allocations received by a taxpayer pursuant to the COVID-19 Relief Grant under Executive Order No. E 20/21-182 and the California Small Business COVID-19 Relief Grant Program established by Section 12100.83 of the Government Code. If the corporation included any amount as income for federal purposes, deduct the amount on line 15."

Second, CA has no such credit. That's why there is the nonconformity difference in the deductibility clause(s). That deduction is what offsets the reportable income; which is how they state it in that table, too:

"The credit is taxable for Federal purposes, which is achieved by reducing the wages deduction by the amount of credit taken.

The refund is taxable for California and the expenses are deductible."

Do you read Spidell:

https://www.caltax.com/forums/topic/erc-refund-taxable-upon-receipt-or-nontaxable-fed-ca/

And:

https://www.ftb.ca.gov/about-ftb/data-reports-plans/Summary-of-Federal-Income-Tax-Changes/index.html

I recommend scanning using a Search for "retention" and for "ERC." There are multiple acts that affect ERC.

Which is referring to the IRS, which is the worst moving target of all of them, seen here:

https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart

 

 

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KEO
Level 2

I do appreciate all of your referencing in this post and I know where to input in Lacerte but the California balance sheet still does not balance and it's off by exactly the ERC. 

Can you plug some numbers in a test federal and california S corp tax return and also input ERC and let me know if your CA balance sheet balances?

ERC is not tax exempt income, it is a reduction of wage expense.  Not semantics as their are input areas for these items.

Federal net income is increased because wage deduction is reduced by ERC.

California net income is less because ERC does not reduce wage deduction.

lina
Level 3

I am off balance on CA as well. The lacerte diagnostic helped fix fed off balance but not CA...not sure what to do or how much longer to wait. 

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Langreck
Level 1

 

The Spidell presenter, Sandy Weiner, stated the following:

Yes the ERC is considered tax-exempt income on the CA return, which would increase CA basis.

So why is GPW stating the refund is taxable in California?

https://gpwcpas.com/grant-credit-loan-and-other-relief-comparison-chart/

AK CPA
Level 1

Lina, how did you fix CA 100s?