The paper-processing hole generated by the pandemic has delayed the Internal Revenue Service from getting much-needed relief from the Employee Retention Credit to small businesses quickly — but some tax professionals have a suggestion for helping with that.
For most of 2020, businesses that received Paycheck Protection Program loans were prohibited from also receiving the ERC, but the Consolidated Appropriations Act, passed Dec. 27, 2020, made the credit available retroactively to the effective date of the CARES Act (March 27, 2020) so long as the qualified wages used for calculating the credit are not used as authorized costs for PPP loan forgiveness.
For 2020 returns that have already been filed, this will require filing a paper Form 941-X to amend the returns, since e-filing is not available for Form 941-X. Therefore, Padgett Business Services has written to the IRS with two suggestions.
“The problem we’re trying to address is the retroactivity of the retention credit for 2020 for people who had PPP loans,” said Roger Harris, president of Padgett. “They went all through 2020 believing they were not eligible for the ERC. The CAA at the end of the year made the credit available for everyone that had PPP loans, so now they have to amend their returns instead of having the ability to take the credit in real time.”
“While [the pandemic] is hampering multiple aspects of taxpayer account management, the long wait time for processing paper tax returns will certainly delay much-needed relief from the ERC reaching small businesses,” Harris wrote in the letter to IRS Commissioner Charles Rettig.
“As you know, the IRS has not provided employers with the ability to e-file these returns and thus they must be filed on paper. Additionally,the CAA could precipitate the need to amend 2020 income tax returns as well, since it will retroactively reduce a business’s wage expenses,” he wrote.
Harris suggested two steps the service could take to remedy the situation.
“In order to simplify and bring needed relief as quickly as possible, Padgett Business Services would like to recommend that the IRS provide a dedicated address for these particular 941-X forms,” he wrote. “These forms could then be quickly processed, getting relief out to small employers now — when they need it most.”
The letter then suggested that, instead of having taxpayers amend their 2020 tax returns, the IRS should provide businesses filing retroactively for the ERC, with the option of including any reduction of wage expense as income on their 2021 tax returns. “This action would simplify filing for both taxpayers and the IRS,” the letter continued.
“The second part is related to the fact that at some point, you have to reduce the wage expense for the amount of credit that the business owner receives,” explained Harris.”That could mean amending prior-year returns, which is burdensome and creates potential for penalties and interest due to underpayment of tax, so we felt it was reasonable to give small-business owners the option of including credits in their 2021 returns, so payments could be made timely and avoid having to amend returns. This benefits taxpayers and the IRS — it’s one less return the business has to file, and one less return the IRS has to process.”
Finally, for the long term, Padgett recommended that Congress fund, and that the IRS make the requisite software changes to eliminate the need for filing any return — but especially form 941-X — on paper.
“What we’re asking for is reasonable — expediting processing and giving taxpayers the option to lower the paperwork burden on them and the service,” the letter concluded.
