New IRS Guidance on ERC Brings Flexibility and Relief to Taxpayers

2025-04-17

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The IRS recently issued new guidance on accounting rules for the Employee Retention Credit (ERC) that will provide relief and new options for taxpayers whose refunds for ERC claims were either significantly delayed or disallowed.

Key guidance

Most notable is that the new guidance allows taxpayers to apply the ERC to current year returns rather than the credit year, providing significant relief for taxpayers who are only now receiving ERC funds.

Additionally, the updates provide options for taxpayers who either did not reduce wage expenses when claiming the credit or had ERC claims disallowed after previously reducing such expenses. The IRS has now confirmed the wage expense adjustment as gross income on income tax returns for the tax year can be included when the ERC is received. An amended 2021 (or 2020) income tax return is no longer required.

The IRS updates were released in the form of new sections to the FAQ page about the ERC on the IRS website. (Please note – each section is indicated with the date of the most recent update. The key updates appear in the new “Income Tax and ERC” section of the FAQs. Scroll down to search for the sections with March 20, 2025 updates.)

Background

The ERC is a payroll credit that eligible taxpayers were able to claim quarterly for wages paid in 2020 and 2021 during the COVID-19 pandemic. Many taxpayers claimed these credits on amended payroll tax returns after the credit ended in late 2021, but the IRS has been slow to process those returns. As a result, some taxpayers are just now receiving their refund checks, and others are still waiting.

IRS guidance has been consistent in that the ERC relates to the year the wages generated by the credit were paid. The proper treatment has been a reduction in the wage deduction in the year of the credit. This means that a taxpayer only now receiving an ERC refund check would be forced to amend their tax return for the year the wages related to (2020 or 2021).

The delayed payments caused practical issues due to statutes of limitations on amending returns and other issues. Many taxpayers wanted to confirm that the IRS would process their ERC refund claim before amending their return, given the significant ERC review the IRS has undertaken over the last two years. However, taxpayers only have three years from the date of filing to amend tax returns; as a result, all 2020 tax returns filed timely or on extension have now passed the window to amend, and 2021 returns were rapidly approaching since a timely filed 2021 return’s window to amend would end on April 15, 2025.

The new guidance clarifies that taxpayers do not need to file amended returns to address ERC received in a year after the original tax year, but they can include the amount in income in the year received. For example, a 2021 ERC amount received in 2024 can be included in gross income on the 2024 return. There is no distinction as to whether the taxpayer is on a cash or accrual basis.

The IRS reached this conclusion under the tax benefit rule. If a previously deducted amount is impacted by a later event (in this case, the ERC payment), the taxpayer should recognize income.

We’re here to help

The new guidance provides clarity and flexibility for taxpayers navigating ERC issues and helps avoid the complexity of amending closed or soon-to-close tax years.

If you would like to discuss the ERC and your business, contact your JLK Rosenberger team member or click here to contact us. We look forward to speaking with you.