The ERC and Federal Deductions on Income
Q. Does the employee retention credit reduce the expenses that an eligible employer could otherwise deduct on its federal income tax return?
A. Yes. Section 2301(e) of the CARES Act provides that rules similar to section 280C(a) of the Internal Revenue Code (the "Code") shall apply for purposes of applying the Employee Retention Credit. Section 280C(a) of the Code generally disallows a deduction for the portion of wages paid equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance would apply under the Employee Retention Credit, such that an employer's aggregate deductions would be reduced by the amount of the credit as result of this disallowance rule.
COVID-19-Related Employee Retention Credits: Special Issues for Employers FAQs