How Is Your State Treating Your ERTC?

Many restaurants have had the opportunity to apply for the Employee Retention Tax Credit (“ERTC”) in light of government orders imposed on their operations throughout 2020 and 2021. These credits can be substantial, and the IRS has made it clear that ERTC is factored into the employer’s taxable income in the year in which the wages generating the credit are paid.

For example, if an employer pays 2021 wages or healthcare plan expenses that are eligible for ERTC, the 2021 deductible wages are reduced to the extent of the credit, regardless of when the ERTC is claimed or received. Simply put, less deduction results in more taxable income.

However, while the IRS has established that they will tax ERTC in the year in which the credits are being generated, business owners may also be wondering about potential state tax implications. Unfortunately, there is no clear answer; every state has its own tax laws, so when the IRS rolls out something new, businesses will often have to wait and see how state taxing authorities will react.

To illustrate further, based on how certain states treat federal deductions disallowed by IRC 280C (the specific code section referenced in the ERTC), states like California, Georgia, Illinois, Maryland, New York, and Texas generally allow corporate taxpayers to deduct the wages and healthcare plan expenses that the IRS disallows. On the other hand, states like Massachusetts, New Jersey, and Pennsylvania generally conform to the IRS treatment and disallow corporate taxpayers from taking the deduction, even though there may be no benefit for the credit at the state-level.

Given the size of these credits, and the aggressive tax rates that some of these states impose, this treatment can save or cost your business a significant amount of money, which is why it is important to get it right. Speak to one of our State and Local Tax (SALT) Practice advisors or a Restaurants & Hospitality Practice professional about your ERTC and the state tax treatment as soon as possible to ensure that there are no unpleasant surprises on Tax Day.