The California Franchise Tax Board (FTB) recently released a statement regarding the taxability of the refundable portion of the Employee Retention Credit (ERC).
The FTB previously indicated that an ERC refund would be taxable for California income tax purposes, but that the wages used to claim the credit would remain deductible. The FTB has now reversed its position based on its review of the applicable federal rules and guidelines.
As such, a business that claims the ERC is not required to include the refundable portion of the credit on its state income tax return nor is it required to reduce the amount of deductible wages.
Businesses that already filed original or amended returns wherein an ERC refund was reported as taxable income should review the tax impact of that position. Where the tax impact was substantial, businesses may want to file an amended return that reports less income to claim a refund for taxes that were previously paid.
The Employee Retention Credit and related income tax compliance are complex and nuanced. If you have any questions about the ERC or its impact on you or your business, please contact GHJ’s Tax Services Team.