Amending 1120-S for ERC

[Terry D EA]

I posted this question on another board and didn't get any response. I am assuming the topic is new and folks like me are just now gaining some experience with this. After several hours of research, I have come to the conclusion that amending the 1120-S for the ERC is fairly simple. In Drake, there is an input screen for form 5884-A. Two entries are required, the qualified wages the 40% amount of the qualified wages. This adjusts the payroll wages on page 1, of 1120-S and properly corrects the shareholder K-1 (in my case a single shareholder). All good so far. Another colleague working on one of these is very adamant that I should not rely on any calculations provided by a 3rd party and should start from the beginning to arrive at hopefully the same numbers. In this case Paychex prepared the ERC for this client and provided the figures. I am preparing a statement of the periods and qualified wages to attach to the return in support of the form 5884-A. Isn't there something in circular 230 that covers me on this? To me, this is the same as a client providing me a P&L and balance sheet to prepare their tax return. None of us audits the client's books or reviews them prior to preparing the tax return. I know the ERC was calculated and received, and the I am amending the tax return as required from the information the client provided. I fail to see anywhere in this situation that could constitute tax fraud, evasion, or willful negligence. What would anyone else do in this situation?

[Medlin Software, Dennis]

I am suspect of any late ERC claims.  Why?  The availability was "all over" the news at the time. Any employer who failed to claim is derelict in duty.  Any corp should be replacing those who failed to represent the corp properly, failed their fiduciary duty.

With the above said, some slip through who are genuine folks.  But, the caveat is most of the late claims are third party claims, where the employer has granted some percentage of the credit to the third party, without pondering, for one second, the cost of amending other items too, and how little they will get, or maybe even nothing, or owe, for thee late contingency claims.  That is assuming the third party type claim is even legit - meaning the emplyoer really had eligible amounts to claim, which can be suspect in certain cases.

[DANRVAN]

2 hours ago, Terry D EA said:

I am preparing a statement of the periods and qualified wages to attach

I would not attach anything unless it is required.

2 hours ago, Terry D EA said:

should start from the beginning to arrive at hopefully the same numbers.

Is that what you are doing in the above statement?

2 hours ago, Terry D EA said:

What would anyone else do in this situation?

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.

[Lion EA]

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.

[DANRVAN]

2 hours ago, Lion EA said:

Paychex was probably qualified to amend Forms 941 based on your client's word that his income decreased the appropriate percentages,

But OP indicated that ERC was due to a business that became inoperable resulting from a qualified disaster and therefore should be claimed on form 5884-A.  In that situation, both the credit and wage deduction flow from form 5884-A to the actual income tax return; which is 1120-S in OP case.

10 hours ago, Terry D EA said:

In this case Paychex prepared the ERC for this client and provided the figures. I am preparing a statement of the periods and qualified wages to attach to the return in support of the form 5884-A

 

10 hours ago, Terry D EA said:

I know the ERC was calculated and received

Which ERC credit are you talking about?

The ERC for COVID-19 reduction of business income is reported on 941.

There is also a ERC for businesses that became inoperable because of qualified disasters during the years 2018 - 2020 and continued to pay wages.

After reading your post again, it appears that Paychex amended form 941 for COVID related ERC.  If that is the case, then you simply amend the 1120-S (and K-1s) to reflect the reduction in wage expense.  But you do not file form 8554-A, or you will be double dipping and filing an inaccurate tax return.

You only use form 8554-A when a business was inoperable due to a qualified disaster.  That results in an income tax credit rather than a credit applied to payroll tax deposits on form 941.

[jklcpa]

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.

[Terry D EA]

6 hours ago, DANRVAN said:

But OP indicated that ERC was due to a business that became inoperable resulting from a qualified disaster and therefore should be claimed on form 5884-A.  In that situation, both the credit and wage deduction flow from form 5884-A to the actual income tax return; which is 1120-S in OP case.

 

Which ERC credit are you talking about?

The ERC for COVID-19 reduction of business income is reported on 941.

There is also a ERC for businesses that became inoperable because of qualified disasters during the years 2018 - 2020 and continued to pay wages.

After reading your post again, it appears that Paychex amended form 941 for COVID related ERC.  If that is the case, then you simply amend the 1120-S (and K-1s) to reflect the reduction in wage expense.  But you do not file form 8554-A, or you will be double dipping and filing an inaccurate tax return.

You only use form 8554-A when a business was inoperable due to a qualified disaster.  That results in an income tax credit rather than a credit applied to payroll tax deposits on form 941.

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. 

 

[Lion EA]

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.

[Terry D EA]

Thanks Lion and I do agree with you, but again, I don't have all of the details to make the decision as to whether they qualified or not. The client says they did and worked with Paychex. This client for years has been straight up with everything. Matter of fact, they are no leaving Paychex because of the cost and the fact Paychex did not tell them they had to adjust the 941 (Paychex did this without informing them they learned this from me after the fact), they are part of the Paychex PEO program which costs considerably more, and they never received any information telling them they would have to amend their 1120S. 

I have told the client that they MUST amend the 1120S for 2020, 2021 & individual 2022. The reduction in the wages obviously affects everything. For 2021 there was a loss carryforward that will be eliminated by the adjustments. I goes without saying, the shareholder basis will be adjusted as well. The client is not happy about the fact they have to pay some significant tax after amending. But, they are still money ahead that they never had when it is all said and done.

This is the irritating thing about all of the scam adds and those that were legitimate but failed to properly inform the client of everything that would take place when claiming this credit. Like us, with the EIC, I think the preparation of these credits should require documented due diligence or suffer the same disciplinary action.

[DANRVAN]

On 1/5/2024 at 7:02 AM, Terry D EA said:

Lesson I am learning is to not trust completely some of the resources the internet can return.

I think part of the issue is the confusion with the two types of ERC.  They are similar in some ways and quite different in other ways; particularly in the manner the credits are claimed.

The ERC for an inoperable business due to a designated disaster falls under sect. 38 as a general business credit and used as an offset to income tax via form 5884-A.  

They should have been given different names to avoid the confusion!

[Lion EA]

Ask them to give you whatever they gave Paychex to prove their qualification. Or, ask them for P&Ls for all the relevant quarters.

I think very few, if any, third-party ERC claim providers explained that amending the Forms 941/claiming ERC meant amending Forms 1120-S and 1040. Maybe small print someplace to CYA, but our clients only heard $$$ from claiming ERC and nothing out-of-pocket to the ERC preparers (ERC preparers kept a % of claims). Now they are angry they have to pay tax and pay for amendments.

[Terry D EA]

On 1/6/2024 at 3:22 PM, DANRVAN said:

I think part of the issue is the confusion with the two types of ERC.  They are similar in some ways and quite different in other ways; particularly in the manner the credits are claimed.

The ERC for an inoperable business due to a designated disaster falls under sect. 38 as a general business credit and used as an offset to income tax via form 5884-A.  

They should have been given different names to avoid the confusion!

You are correct. Also correct on the different names to avoid the confusion. I do appreciate you brining this up in the beginning as it caused me to do additional research and study. Initially, I didn't have any clients who qualified for any of the ERC which is why I did not take a deep dive in the beginning. Now I have a good understanding, certainly not an expert, but enough if I by some chance someone contacts me regarding these credits.