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How to adjust of the ERC credit received for year 2021, on 1120S and then how to flow through to 1140 filed jointly. 941 X were filed after filing 1120S

How do I adjust ERC credit received for year 2021, in the modified 1120 S Tax Return for year 2021 and then in the modified 1040 for year 2021, where do I show in 1040 from which data of the 1120S form, so I do not have to pay any tax penalty and interest due to any additional income due to this ERC credit. I normally show 1120S profit from the form K or K-1, on the Schedule E of the form 1040. I file 1040 jointly. 

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2 Replies
EleanoreS
Employee Tax Expert

How to adjust of the ERC credit received for year 2021, on 1120S and then how to flow through to 1140 filed jointly. 941 X were filed after filing 1120S

To adjust an ERC credit received in a prior year, you would have to file amended payroll and income tax returns.  In your case, having a S-Corporation, you would need to file amended forms 941, 1120-S and 1040.

 

You would use the K-1 from your amended 1120-S to amend your personal return on form 1040-X, which would most likely include a corrected schedule E. 

 

There is no way to avoid the imposition of a penalty. Interest is always charged on underpayments under the theory the taxpayer had access to the funds and the IRS did not.  If you are successful in reducing or eliminating penalties, that would also reduce the interest as interest is charged on tax and penalties.  I would suggest waiting to see if penalties are assessed and, if they are, send a letter explaining the circumstances that led to the incorrect credit claim and requesting an abatement of the penalty.  The IRS usually seeks to determine if there was “reasonable cause” for the error.

 

Here is a link to an IRS frequently asked questions about the Employee Retention Credit that will provide some additional information.  Please note that, unfortunately, the ERC voluntary disclosure program (which allowed for a reduced payback and no penalties) closed on March 22, 2024.   

 

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Michele Catlett
Employee Tax Expert

How to adjust of the ERC credit received for year 2021, on 1120S and then how to flow through to 1140 filed jointly. 941 X were filed after filing 1120S

I found good instructions under the section "How to claim the Employee Retention Credit" on the IRS resource on ERC   

It sounds like you amended the 941s in 2021 to reflect the credit.  Next step is to reduce your wages for that same period, 2021.  So you will need to amend the 2021 form 1120S and reduce wages by the amount of the credit.  Then your personal 1040 will also need to be amended.  When you amend the 1120S for 2021 it will create a new K-1 reflecting more net income since you reduced the wages.  When you key the amended K-1 into your personal return it will flow to the Sch E appropriately.

 

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