ERC book and tax treatment
View More DetailsI am amending the 2021 tax return to reflect the ERTC received. The amendment will increase taxable income due to decrease wage deductions. Subsequently, it increased the retained earnings. Is that correct?
Since CA doesn't conform to Federal on the ERTC, there will be equity difference between Federal and CA goinf forward, correct?
Comments
No
From our August 6, 2023 California Minute Podcast (https://www.caltax.com/research/california-taxletter/podcast-transcripts/podcast-erc-refunds-and-california-returns-practitioner-questions-answered/):
Basis issues
Many tax professionals have struggled to determine the correct basis adjustments for clients that receive Employee Retention Credit refunds. At first glance it would appear there would be a basis difference because the income is tax exempt under both California and federal law, but only California allows taxpayers to claim a full deduction for the ERC wages. However, when the journal entries are actually made for these transactions, it becomes clear there is no basis difference for federal and California purposes in the end.
When the federal income tax return is amended to reduce the wage deduction by the amount of the credit claimed, the taxpayer’s basis is increased because net income is increased. On the California side, once the ERC refund is received, it is credited as tax-exempt income. This increases the California basis by the same amount as the increased federal income caused by the reduced wages on the federal return.
