Employee Retention Tax Credit - S corporation STOCK Basis impact

[dan_768]

Hi community,

I'm a bit confused how the ERC tax credit will impact S corporation stock basis. The IRS is increasingly cracking down on S corporation stock basis issues and now even requires a form be filed reporting the taxpayer's stock basis so this is an important issue.

Here's the scenario. In 2020 the taxpayer filed Form 941-X to claim the ERC and was eligible for a refund of $20k which wasn't RECEIVED until 2021 due to the delays in processing the Form 941. Here's how I think things should be reported:

2020 - The DEDUCTIBLE payroll tax expense is reduced by $20k. This is shown on the M-1 as a book/tax difference. The taxpayer's stock basis is effectively increased by $20k in 2020 by virtue of the reduction in deductible wages. 

2021 - The $20k of ERC refund received is not taxable income but doesn't increase stock basis because that adjustment to tax basis already happened in 2020. 

Is that how other people are handling this?  

[JRC]

2020 Entry I would make is:

Change in Basis.

DR Note Receivable xx

CR Tax Expense xx

_____________________________

2021 Entry: No Basis Change.

DR Cash xxx

CR Note Receivable xx