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The Employee Retention Credit: A Ticking Time Bomb of Tax.

For many struggling small businesses, the utilization of the Employee Retention Credit (ERC) was a godsend that allowed them to keep their business open during the pandemic. However, behind all the glitz and glamour that is the ERC, there could be some disastrous tax consequences that are looming.

After the unveiling of the CARES ACT, many savvy tax preparers/CPAs sought to utilize the ERC for their business clients. Often, many of these amended returns were submitted on a contingent basis in which the tax return preparer was entitled to a percentage of the refund that was generated from the ERC. However, these same tax return preparers may have neglected to explain to their small business clients the potential tax ramifications of claiming these credits.

The IRS has alerted recipients of these credits that any business who received the credit is responsible for filing an amended income tax return that includes the credit that was received for the corresponding tax year. This means that small business owners who receive pass through income from a small business will also have to amend their personal income tax returns for these years. This could result in some hefty tax bills for small business owners if they do not plan accordingly and retain a portion of the refund received to fund the increased tax due. 

Furthermore, the IRS has also indicated that penalties will be assessed to any unpaid portion of tax that stems from the ERC credits. With the amount of tax and penalties that could be coming down the pipeline, either through amended returns, or potential audit, there could be a large swath of taxpayers who are looking at a bill that they cannot afford to pay. This is not to say that the ERC was not successful in achieving its desired purpose, but anybody who has claimed or plans to claim the ERC should be fully aware of the long-term tax results it could produce.

Adam Holleran, EA, JD

Timberline Tax Group, LLC

Keywords: Employee Retention Tax Credit, ERC, CARES Act

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