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Again, the sticky part is not reducing wages on an amended 1120-S. The sticky part is determining if your client qualified for ERC in the first place, or for that amount of ERC. If he did not, then tell him about the Voluntary Disclosure Program: https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program#:~:text=You need to repay only,is not taxable as income. If he did qualify, then amend his 1120-S.

@ETax847 Does that handwritten K1 make you queasy? Does it substantially change the return, as in it is going to generate a great big refund? Was the original K1 (if there was one) also handwritten or was it computer generated? Is the original return also handwritten? Who prepared the original return and why aren't they amending (always a big flag for me if there is not a good answer to that question)? Who prepared the entity return that spun the K1 to your prospective client? How much of that entity does your prospective client own? Lots of questions, very little info in the OP. Trust your gut. You should be able to distinguish the BS from a legit taxpayer just trying to do the right thing. Tom Longview, TX

The business also can't use the same wages for the ERC as used for a PPP loan so there is no double dip there either. Paychex wouldn't know how much of the wages may have been used to qualify for the loan.

I DID NOT prepare anything for the ERC. I am not amending anything with form 941. Yes, I prepared all of the forms 1120-S and had no knowledge whatsoever until October 2023 that this client worked with Paychex for the ERC. Paychex prepared the ERC, as well as any amendments. I immediately told the client they will have to amend their form 1120-S. This client is a PEO client with Paychex so all of the filings were under the Paychex EIN and not the client's. All I am doing is amending the TY 2020 and 2021 1120-S to reduce the wage deduction as a result of the ERC. I stand corrected on the use of form 5884-A. DANRVAN is correct. This client only had a reduction of gross receipts and was not forced to close operations. The confusing part of 5884-A was the 40% deduction. Below is what I finally found. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Code shall apply for purposes of applying the employee retention credit. Section 280C(a) generally disallows a deduction for the portion of wages or salaries paid or incurred equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance applies under section 2301(e) of the CARES Act with regard to the employee retention credit, such that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. (An employer does not, however, reduce its deduction for the employer’s share of social security and Medicare taxes by any portion of the credit). It seems straight forward at this point, ex; (figures are hypothetical) the credit calculated by Paychex is $400,000.00, wages originally reported were $3,000.000.00, form 1120-S amendment is $2,600,000.00 = $3,000,000.00 - $400,000.00. This results in the shareholder having to pay a huge tax bill. However, in this case they received the refund and no I didn't know that either, they can use those funds to pay the balance due. I'm concerned about penalties and interest at this point as well and am looking into the penalty relief provisions to see if anything applies here. As I see it, the client made some mistakes. First mistake was not talking to me about this at the onset. I wouldn't have known much at the time but would have found out what I could. Once they engaged Paychex, they still should have informed me but didn't. The client trusted Paychex to provide them all of the information which they did not. Yes, this client is a good reliable client and probably got taken in by the amount of money that I am assuming was proposed to them. I appreciate all of the responses and input here. Lesson I am learning is to not trust completely some of the resources the internet can return.

Did you prepare the original Forms 1120-S for those years and know that your client had the appropriate decrease in income for those quarters? Like anything else, if you know (or should have known) or have any doubts about your client qualifying for ERC, you have to ask more questions, ask for documentation, dig deeper until you're satisfied. Paychex was probably qualified to amend Forms 941 based on your client's word that his income decreased the appropriate percentages, but Paychex had no working knowledge or your client's income. The fact that you're asking suggests you're not sure you have all the facts and circumstances.

I would not attach anything unless it is required. Is that what you are doing in the above statement? Depends on the facts and circumstances. But with all the ERC abuse I would ask for some sort of summary. How well do you know your client, how reputable is Paychex vs some of the ERC mills that have popped up? Bottom line is you are relying on clients representations, but doesn't hurt to ask for additional information given the recent ERC abuse.

That is correct, I think of 1245 and 1250 as subsets of 1231 property. Sec 1231(b)(1) includes property "of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year". Section 1250 applies since 1250(c) states "the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167." Therefore, the undepreciated portion of the building and land are taxed as capital gains. Because of the above definitions, the rental does not need to rise to the level of a trade or business to be classified as either 1231 or 1250 property.

Are you familiar with the firm who generated the K-1? Or the preparer of that return? For a prospective client, I'd probably say we're not a good fit. Goodbye. For an existing client that I like and respect, I'd dig a little deeper.

The client has never had PAL's. Usually there was small net income and never more than $25,000 loss so any loss was taken contemporaneously. There was ordinary income from 1245 or 1250 depreciation recapture as there was none. The remaining gain should be 1231 taxed as cap gains. But this gain shown on 4797 Part III line 24 and Summary of Part III Gains line 30. There is a small deduction from some small 1245 pieces with the full gain on line 32. Well, I'll be d*****! I finished lunch and just reopened this return, noting that 3 forms were downloaded at 2:43pm. Form 8582, the missing link. A thing of beauty which I completely missed that was missing. All is now right with my little world with this client. That Surprise entry up there? Gone! Without 8582, the data had no correct place to go so just landed in the wrong place. It's unfair to make my brain work so hard at my age but I am so grateful for folks chiming in. I was 90+% certain I was correct but...but... I hope this is the worst thing that happens this season!

Here's to health, happiness, and prosperity in 2024!

Happy Healthy and Prosperous New Year in 2024 to all my dear colleagues here on the forum.

Wishing you all a Happy, Healthy and Comfortable New Year and New Tax Season. May we all continue to prosper and be of some value to each other.

Happy......Happy.........Happy..to you.