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EMPLOYEE RETENTION CREDIT where to Enter 1120-S

mike9
Level 3

I am completely confused about how to take this credit on Pro Series 1120-S. The guidance in February (I thought )was to to reduce wages by the amount of the credit and record it as a receivable. 941-X's were to be prepared requesting a refund . We have done several tax returns this way and are waiting for the clients to get the refunds.

Now it seems The latest IRS guidance  says that the employee retention credit is to be reported on Form 1120-S on line 13g (Other Credits), using code P. on Schedule K and using Form 5884. This creates a TAX credit on K-1 to be applied against 2020 taxes.

So does this mean there wont be any refunds and instead of a refund  we are supposed to enter this as a tax credit ? Should we amend the previously filed 1120-s returns? And the 941x.s?

Thanks so much for your help

 

 

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dkh
Level 12

If you've filed 941X requesting refunds then don't take the credit on 1120S.   Amending the amended 941X sounds like a problem waiting to happen.    

I haven't read the recent guidance but I thought the ERC was handled by reducing wages on 1120S.

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26 Replies 26
dkh
Level 12

If you've filed 941X requesting refunds then don't take the credit on 1120S.   Amending the amended 941X sounds like a problem waiting to happen.    

I haven't read the recent guidance but I thought the ERC was handled by reducing wages on 1120S.

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mike9
Level 3

Thank you!

arandersen
Level 2

It is confusing, but Form 5884 is NOT used for the Covid-related PAYROLL tax ERTC credit.  The 5884 instructions say:  "Qualified wages do not include the following wages:  Any wages used to figure a coronavirus-related employee retention credit on an employment tax return, such as Form 941, Employer's QUARTERLY Federal Tax Return."

5884 is used for other disaster-related credits and is an income tax credit.  The Covid ERTC is a payroll tax, not an income tax, credit.  So booking the payroll tax credit as a receivable makes sense.  And I believe, but am not sure, that the amount of that payroll tax credit must reduce deductible wages on the Form 1120S.  But in any event, it is not an income tax credit and will not appear as a credit on any K-1.  Instead, as you say, you will have a receivable for the future receipt of your payroll tax refund arising from claiming the credit on an amended payroll tax return for the fourth quarter of 2020.

qbteachmt
Level 15

Line 13g code P specifically states: "Other credits (code P). Attach a statement to Form 1120-S that identifies the type and amount of any other credits not reported elsewhere."

From the 1120S instructions:

"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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mike9
Level 3

As usual you guys are so awesome. Thank you for confirming what I thought . One of my clients send me a link to a CPA chat from a  different board and they seem to be claiming that  it is a Tax Credit  using 5884 A and Code P 

 

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mike9
Level 3

Thank you !!

dsocpa
Level 4

I am having the same issue.  S Corp with employee retention credit.  I entered the credit on the Schedule M-1/Reconciliation of Income Deduction Items line 2.  The amount flowed to the k-1 line 13 with code P.

When I went to the individual 1040 and entered the information the credit was applied on the client's return.  The result was a fairly substantial refund for this client.  Anyway, I knew that couldn't be correct.  As is mentioned on this thread the credit is a payroll credit.  I understand the wage expense should be reduced for the credit amount.  It sounds as though the credit is not separately identified on the 1120S or the 1040 at all, otherwise there is a "double dipping" result of the credit on the 1040.  The result is the W3 total wages will not agree to the amount on the 

To add to confusion, the title of form 5884-A is Employee Retention Credit.  Jeeze, couldn't they at least call it something else!

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arandersen
Level 2

The title of Form 5884-A is actually "Employee Retention Credit for Employers Affected by Qualified Disasters".  The instructions then list all the "qualified disasters" that are eligible.  Covid is not listed as a qualified disaster.  It IS confusing, but I am pretty sure that you do not use this form 5884-A for the Covid-related PAYROLL TAX credit because it is not an INCOME TAX credit.

CGS
Level 2

As mentioned, this ERC for COVID is a Payroll Tax Credit, not an Income Tax Credit (Line 15P on the K-1).

However, ProSeries is considering this as an Income Tax Credit still...For Basis Calculations, this Credit is considered a Non-Deductible Reduction in Basis. The Issue is that this Credit also creates an Asset (a P/R Tax Refund or Pre-Paid P/R Credit).

 

I believe that we will need to add an offset/override to the Non-Deductible Expense on the Basis Statement.  Also, the M-2 that the program calculates will not tie to the Balance Sheet when you record your A/R for the ERC.

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qbteachmt
Level 15

It's not an income tax credit and it's not passed through to the individual tax return. It is a reduction of Expense. You need to read the instructions for the tax form you are working on. This part is already in this topic, from the 1120S instructions:

"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)."

Although it keeps being overlooked.

The credit is reported on the 941; a 941 has no pass through info on it. That should help explain why this is not passed through.

There is no AR. Are you asking about Applied for Refund? That should help you understand it's not a credit. It's a reduction of Expense, and you are asking for your money back.

"this Credit is considered a Non-Deductible Reduction in Basis."

You realize this topic is a mess, because bringing Form 5884 and M-2 adjustments into the discussion are red herrings.

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arandersen
Level 2

My question is does the payroll credit reduce BOTH wage expense, Form 1120S Lines 7 & 8, as well as payroll tax expense included in Line 12 (Taxes and Licenses).  The instructions you cite re Lines 7 & 8 seem pretty clear that wage expense must be reduced by the payroll tax credit, but nothing is mentioned about whether the otherwise deductible payroll tax expenses included in Line 12 must also be reduced.  If both are reduced, this is double counting.

For example, say that wages are $10 million and payroll taxes are about $1 million and health insurance expenses are another $1 million so the company claims a $2 million ERTC (because the ERTC is also based on both payroll wages plus health insurance expenses I believe).

The company must debit an asset for the $2 million payroll tax refund/credit, so say it debits $2 million to cash or refunds receivable.  Obviously it would credit payroll tax expense and/or health insurance expense by the same $2 million, which creates $2 million of taxable income in that expenses are reduced by $2 million.  So that should be the end of it.  The $2 million in reduced expenses is effectively taxed.

But if, in addition, the $10 million in Line 7 & 8 wages must also be reduced by the $2 million, then we have a $4 million reduction in expenses for a $2 million credit.

What am I missing?  All I can think of is that the $2 million credit, like the PPP loan forgiveness, is treated as tax exempt income as to the payroll tax & health insurance items.  In other words, when you get the $2 million credit, you do debit cash or refunds receivable but you do NOT credit an expense account.  Instead, you credit tax exempt income.  Then you go over to wages on Line 7 & 8 and do reduce the wages by the $2 million, according to the Form 1120S instructions.  The end result is that the $2 million ERTC does effectively increase taxable income by the $2 million (in the form of the wage expense reduction), but not by $4 million because we do not also have to reduce payroll tax or health insurance expense by the same $2 million??

UPDATE:  I believe my above analysis is correct.  Line 7 and 8 wages are indeed reduced, but no part of the ERTC will reduce payroll tax expense. 

See the article, partial quote below (emphasis in bold added by me):

Is the ERC Taxable?

Yes and no. The ERC is not includible in gross income, but it is subject to expense disallowance rules, which effectively make it taxable. See Notice 2020-21, Q&As 60-61; IRS FAQs 85 & 86 . For example, if an employer received $200,000 in ERCs, then it would be required to reduce its deductible wage expenses, including qualified health plan expenses, by $200,000, thus subjecting it to tax on an extra $200,000 of income (or causing less of a loss if it was in a net loss position). The expense reduction rules apply to the wages, including qualified health plan expenses, paid or incurred in 2020 and that were reimbursed by the ERC. There is no reduction in the employer’s deduction for its share of Social Security and Medicare taxes by any portion of the ERC.

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qbteachmt
Level 15

"as well as payroll tax expense"

Wages. Not Taxes.

"If both are reduced, this is double counting."

You really are overthinking this. For one thing, the "tax" amount that is Employee share, is from Wages. It's not Taxes.

"The company must debit an asset for the $2 million payroll tax refund/credit, so say it debits $2 million to cash or refunds receivable. Obviously it would credit payroll tax expense and/or health insurance expense by the same $2 million"

Wages expense gets reduced. it's right there in the Form instructions.

"What am I missing? All I can think of is that the $2 million credit, like the PPP loan forgiveness, is treated as tax exempt income as to the payroll tax & health insurance items"

Wages. It's right there in the Form instructions. It's not like loan forgiveness. it's a reduction of an amount you don't need to send on, when you are filing for the credit and not asking for the refund. So in this example, there is no Debit to Bank, because you didn't have to make that payment. It removes the liability.

"you do debit cash or refunds receivable but you do NOT credit an expense account. Instead, you credit tax exempt income. Then you go over to wages on Line 7 & 8"

Again: you are overthinking this. It isn't tax exempt Income. It's a reduction of Costs.

You can read the CARES Act for yourself, you know.

Yes, your Update is more on target.

There is a lot of misdirection in this topic. It never was this hard.

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mike9
Level 3

I agree totally. It is so easy to over think this since Intuit did a bad job with this on Pro Series. I am not sure how Lacerte users feel.  Yes the program does make you over ride the M-1 adjustment for the credit .

It would have been so much easier if the IRS had come out and allowed  to recognize this CREDIT on cash basis.

 

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mike9
Level 3

Your frustration is shared by many. I bet many passed the credit through K-1 bec of the way they prefaced From 5884 on the Pro Series platform, they should have added a 941-X Credit Cares act refund zoom or something like that.. W-3 wage to Tax Return wages is never a major item for examiners in my experience as long as you can reconcile it for them.

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dsocpa
Level 4

Agree 100%.  I think the IRS bears some responsibility for this too.  I noticed the 5884-A is not listed on the credit forms if you go to the all forms list.  I had to hunt through to find it.  Of course I noticed when I saw my client went from owing a couple thousand to getting back almost $10k.

Thanks to you both for responding.

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dswasdin
Level 2

Go to Balance Sheet Miscellaneous menu

Scroll to "Other"

Enter "2" in M-1 Adjustment for "Refundable Employee Tax Credit" to keep the adjustment from showing up on M-1.

 

CGS
Level 2

Well...Where is the Balance Sheet Misc Menu?

Learn something every day.

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dswasdin
Level 2

Menu across the top of the screen 

Go to the Balance Sheet Section. You’ll see Balance Sheet Miscellaneous.  Enter that screen.  Scroll down about 2/3-3/4 of the page and you’ll see the options.  

 

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mike9
Level 3

Balance Sheet menu? In pro Series? Sorry where is it ?

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dswasdin
Level 2

I apologize.  I am working in Lacerte.  

Do you clear your diagnostics?  If you haven’t look at diagnostics, look for a link or instructions there.   I would assume all softwares would have diagnostics.  Lacerte gave me a link.  

If it is not in diagnostics, where do you go to adjust Schedule M1?  Where do you go to enter balance sheet data and options?  In Lacerte there is a drop down menu for page 5 form 1065, page 4-5 of 1120S.  There are 4-5 options that drop down (Balance Sheet, Balance Sheet Other, M1-M-2, M-3, Member Basis).  One says Balance Sheet Other.  If you’re working in Pro, I would look at the detailed options in that area of the Software.  

If there is still nothing, you’ll have to do an offset entry to clear it being put into M1.  Lacerte is assuming that you have not accounted for it on the books, but we all have.  So the option we have for the software to ignore that assumption resolved the issue.  If you don’t have this, then you’ll need to either reduce salary directly and delete the ERC amount the software is using to calculate reduced wages or create an offset in M-1 that will clear out the auto adjustment.   The auto adjustment is an error.

I would think Pro Series should have the same option to not do that adjustment.  It’s something like “enter 1 to force adjustment, enter “2” to force no adjustment.  

Little things (important little things!) like this hidden in the software is so frustrating!

Good luck 🙂

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kleavitt02
Level 2

Is there any possibility the wage reduction can be reported in the year the credit is received rather than the year the wages were paid? I prepared a Form 1120S for 2020 that is on the cash basis and took the ERC on the fourth qtr., 2020 Form 941. I did not reduce the wage expense on the Form 1120S for 2020 as the ERC was received by the taxpayer in 2021 and they are on the cash basis. It seems as if I have to amend the 2020 1120S in order to reduce the wage expense even though the ERC wasn't received until 2021. I originally was going to reduce the wage expense in 2021. Is there anyone who knows with any authority that I don't need to amend the 1120S since the taxpayer is on the cash basis? I think I'm out of luck.

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dswasdin
Level 2

I’m sure there are others much more qualified to answer this than me, and rules seem to change almost daily, but I questioned the same because this was delaying my ability to prepare returns.  

The IRS website stated the ERC has to go on the return for the same year the credit is calculated for, even if it means you have to amend the return.  So, credits for qtrs in 2020 would have to go on the 2020 return.  

I can’t tell you how disappointed I was to read this. 

arandersen
Level 2

I agree.  I found the below-referenced article on Bloomberg from a Google search.  It describes how Code section 280C supports the position that if the credit is for the 2020 year, even cash basis taxpayers must reduce the wages in 2020:

https://news.bloombergtax.com/daily-tax-report/when-is-the-amount-of-the-employee-retention-credit-s...

Quote from the above article:

"Further, section 280C provides in relevant part that no deduction is allowed for wages “paid or incurred for the taxable year” in which the credit is “determined for the taxable year.” This suggests that expense disallowance occurs in 2020, and is consistent with the IRS position regarding section 280C more generally. See, e.g., Treas. Reg. Section 1.280C-1 (expense reduction occurs in the year the credit is “earned”). Thus, regardless of whether a cash-basis taxpayer claims the 2020 ERC in 2020 or 2021, expense disallowance likely occurs in 2020."

qbteachmt
Level 15

"since the taxpayer is on the cash basis?"

In this case, though, that part you are asking about is the Banking, not the event. Payroll is reported on cash basis, the credit is taken on cash basis, and the filing for the credit in 2020 is being taken against the 2020 wages. The employer also might have had the money in hand already by holding back deposit amounts, and if not (such as filing an amended 941X), there is going to be a Receivable on the Balance Sheet.

"Notice 2020-22 provides relief from the failure to deposit penalty under section 6656 of the Internal Revenue Code for not making deposits of employment taxes, including taxes withheld from employees, in anticipation of the FFCRA paid leave credits and the employee retention credit. The ability to defer deposit and payment of the employer's share of Social Security tax under section 2302 of the CARES Act applies to all employers, including employers entitled to paid leave credits and employee retention credits."

Which is why the wages would be reduced on the 2020 1120S, even if you are waiting for the credit to be refunded to you.

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cin15
Level 3

Thank you!  I have been looking for that for what seems like days.  LOL  Couldn't get my balance sheet to balance. 

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christin
Level 2

THANK YOU!!!  I have done 4 chats with Intuit and they couldn't help me fix this!!