Can a corporation that had its federal wage deduction disallowed because it claimed the Employee Retention Credit take an offsetting subtraction on its Illinois income tax return?

Plain-English summary

The Illinois Department of Revenue confirmed that corporations don't get double-taxed on the federal Employee Retention Credit (ERC). A business asked whether corporations -- particularly S-corporations -- that had part of their federal wage deduction disallowed because they claimed the ERC could take an equivalent subtraction on their Illinois return, so that the same dollars aren't effectively taxed twice.

Here's the chain the ruling walks through: Section 2301(e) of the CARES Act says the Employee Retention Credit is subject to "rules similar to" IRC Sections 51(i)(1) and 280C(a). Section 280C(a) is the federal rule that disallows a wage deduction equal to the amount of certain employment credits claimed. IRS Notice 2021-20 confirms that this same disallowance logic applies to the ERC -- an employer's federal deduction for qualified wages is reduced by the amount of the credit. So a business that claims the ERC loses a federal wage deduction it would otherwise have had.

On the Illinois side, IITA Section 203(b)(2)(I) already lets corporations subtract amounts disallowed as federal deductions under a list of IRC sections, including Section 280C, for tax years ending on or after August 13, 1999. Because the ERC's wage disallowance operates "similar to" Section 280C(a), the Department ruled that corporations can subtract that disallowed wage amount from their Illinois adjusted gross income under IITA Section 203(b)(2)(I)(ii). The subtraction is taken on the 2021 Schedule M, Other Additions and Subtractions (for businesses), Step 3, Line 16d, "expenses related to certain federal credits."

This is a General Information Letter (GIL), not a Private Letter Ruling. That means it is not a statement of Department policy and is not binding on the Department -- it merely explains how the relevant statutes and guidance fit together for the general situation described.

What this means for you

Corporations (including S-corporations) that claimed the ERC

If your corporation had federal wage deductions disallowed under IRC Section 280C(a) because you claimed the CARES Act Employee Retention Credit, you are not stuck absorbing that disallowance on your Illinois return too. IITA Section 203(b)(2)(I)(ii) lets you subtract that same disallowed wage amount from Illinois adjusted gross income, which prevents the ERC from being effectively taxed twice (once through the reduced federal deduction, and again if Illinois started from a federal number that already reflected the reduction).

Accountants and preparers filling out 2021 Schedule M

The Department pointed specifically to where this subtraction belongs: the 2021 Schedule M, Other Additions and Subtractions (for businesses), Step 3, Line 16d, "expenses related to certain federal credits." The letter notes that the Schedule M line instructions list several IRC sections (45G(e)(3), 171(a)(2), 265, 280C, 291(a)(3), 807(a)(2)(B), 807(b)(1)(B), 832(b)(5)(B)(i)) but don't explicitly mention CARES Act Section 2301(e) by name -- this GIL fills that gap by confirming the ERC-related disallowance is treated as a Section 280C disallowance for purposes of that line.

Taxpayers relying on this letter for planning

Because this is a GIL rather than a Private Letter Ruling, it is not binding on the Department for anyone, including the requester. The letter also notes that "substantially identical provisions are included in Section 203 of the IITA for taxpayers other than corporations" -- but the ruling itself only formally answers the question for corporations, since that's what was asked and what IITA Section 203(b)(2)(I) as quoted addresses.

Common questions

Q: Why would a corporation's federal wage deduction be disallowed in the first place?
A: Section 2301(e) of the CARES Act applies "rules similar to" IRC Sections 51(i)(1) and 280C(a) to the Employee Retention Credit. Section 280C(a) requires that no deduction be allowed for the portion of wages equal to certain credits claimed. IRS Notice 2021-20 confirms this disallowance applies to ERC-related qualified wages (including qualified health plan expenses), reducing the employer's deduction by the amount of the credit.

Q: What Illinois statute allows the offsetting subtraction?
A: IITA Section 203(b)(2)(I)(ii), which allows corporations to subtract amounts disallowed as deductions under several IRC sections -- including Section 280C -- for taxable years ending on or after August 13, 1999.

Q: Where do I report this subtraction on the Illinois return?
A: On the 2021 Schedule M, Other Additions and Subtractions (for businesses), Step 3, Line 16d, "expenses related to certain federal credits."

Q: Does this apply to S-corporations specifically?
A: The request specifically asked about S-corporations, and the Department's ruling addresses "corporate taxpayers" generally under IITA Section 203(b)(2)(I)(ii). The letter separately notes that substantially identical provisions exist in IITA Section 203 for taxpayers other than corporations, though that language is not elaborated further in this letter.

Q: Is this ruling binding on the Department?
A: No. This is a General Information Letter (GIL), not a Private Letter Ruling. The letter states explicitly that a GIL "does not constitute a statement of Department policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department." It provides general guidance rather than a binding determination for a specific taxpayer's facts.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2022/it22-0001-gil.pdf

Original ruling text

IT-22-0001-GIL 02/23/2022 SUBTRACTIONS
Corporations disallowed a federal wage deduction for the Employee Retention
Credit are eligible for a subtraction modification as provided in IITA Section
203(b)(2)(I)(ii). (This is a GIL.)
February 23, 2022
Re: Illinois income tax
Dear NAME:
This is in response to your letter dated February 10, 2022, in which you request
information regarding Illinois income tax. The nature of your request and the
information you have provided require that we respond with a General
Information Letter (“GIL”), which is designed to provide general information, is not
a statement of Department policy, and is not binding on the Department. See 2
Ill. Adm. Code 1200.120(b) and (c), which may be found on the Department's
web site at www.tax.illinois.gov.
Your letter states as follows:
I would like to request a General Information Letter regarding IITA Section
203(b)(2)(I). This section deals with the deductibility of several federally
disallowed deductions; in particular IITA 203(b)(2)(I)(ii) as it relates to
Section 280C of the Internal Revenue Code.
Section 2301 of the CARES Act of the IRC provides a fully refundable tax
credit known commonly as the Employee Retention Credit (ERC). Section
2301(e) states that “rules similar to the rules of sections 51(i)(1) and
280C(a) of the Internal Revenue Code of 1986 shall apply.” Furthermore,
according to the IRS Covid-19-Related Employee Retention Credits:
Special Issues for Employers FAQ’s, their response to Question 85 again
refers to section 280C(a) stating “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 a
result of this disallowance rule.”
The instructions for 2021 Schedule M (for businesses) give line specific
instructions as follows: Lines 16a through 16g – Expenses of federally taxexempt income and federal credits – Enter the amount “of any expenses
that were disallowed as federal deductions because the income was
exempt from federal tax or because a credit was allowed under IRC
Sections 45G(e)(3), 171(a)(2), 265, 280C, 291(a)(3), 807(a)(2)(B),
807(b)(1)(B), or 832(b)(5)(B)(i).” This particular line instruction does not
directly refer to IRC Section 2301(e) of the CARES Act.

I am requesting a GIL clarifying whether businesses, in particular Scorporations, can take a subtraction equal to the amount of their wage
disallowance as it pertains to the Employee Retention Credit. Since the
IRS took the position that it is to be treated “similar” to the rules of Section
280C(a) will the Illinois Department of Revenue take the same position
and allow a subtraction on Schedule M for the amount of disallowance as
it related to the federal ERC? If so, is this subtraction to be reported on
Schedule M Line 16d Expenses related to certain federal credits or would
it appear elsewhere on the return?
Thank you kindly for your assistance on this matter. Should you need
additional information I can be contacted at ###-###-#### or via email at
E-MAIL.
RULING
Section 2301(e) of the Coronavirus Aid, Relief, and Economic Security
(“CARES”) Act provides that “for purposes of this section, rules similar to the
rules of sections 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 shall
apply” for purposes of administering the Employee Retention Credit. (CARES
Act, Pub. L. No. 116-136, 134 Stat. 281) Section 280C(a) of the Internal
Revenue Code (“IRC”) provides a rule for employment credits that “no deduction
shall be allowed for that portion of wages or salaries paid or incurred for the
taxable year which is equal to the sum of the credits determined for the taxable
year under sections 45A(a), 45P(a), 45S(a), 51(a), and 1396(a).” (IRC §280C(a))
Notice 2021-20 issued by the Internal Revenue Service (“IRS”) provides
guidance on the Employee Retention Credit as it applies to qualified wages paid
after March 12, 2020, and before January 1, 2021. As explained in Section F of
the Notice, “section 280C(a) of the Code generally disallows a deduction for the
portion of wages or salaries paid or incurred equal to the sum of certain credits
determined for the taxable year. Accordingly, a similar deduction disallowance
applies under section 2301(e) of the CARES Act with regard to the employee
retention credit, such that an employer’s deduction for qualified wages, including
qualified health plan expenses, is reduced by the amount of the employee
retention credit.” (Notice 2021-20 p. 13-14)
For corporations, Section 203(b)(2)(I) of the Illinois Income Tax Act (“IITA”)
currently allows a subtraction from their adjusted gross income:
With the exception of any amounts subtracted under subparagraph (J), an
amount equal to the sum of all amounts disallowed as deductions by (i)
Sections 171(a)(2) and 265(a)(2) and amounts disallowed as interest
expense by Section 291(a)(3) of the Internal Revenue Code, and all
amounts of expenses allocable to interest and disallowed as deductions
by Section 265(a)(1) of the Internal Revenue Code; and (ii) for taxable
years ending on or after August 13, 1999, Sections 171(a)(2), 265, 280C,

291(a)(3), and 832(b)(5)(B)(i) of the Internal Revenue Code, plus, for tax
years ending on or after December 31, 2011, amounts disallowed as
deductions by Section 45G(e)(3) of the Internal Revenue Code and, for
taxable years ending on or after December 31, 2008, any amount included
in gross income under Section 87 of the Internal Revenue Code and the
policyholders' share of tax-exempt interest of a life insurance company
under Section 807(a)(2)(B) of the Internal Revenue Code (in the case of a
life insurance company with gross income from a decrease in reserves for
the tax year) or Section 807(b)(1)(B) of the Internal Revenue Code (in the
case of a life insurance company allowed a deduction for an increase in
reserves for the tax year); the provisions of this subparagraph are exempt
from the provisions of Section 250.
Substantially identical provisions are included in Section 203 of the IITA for
taxpayers other than corporations.
As a deduction disallowance would apply under Section 2301(e) of the CARES
Act with regard to the Employee Retention Credit similar to the rules of Section
280C(a) of the IRC, corporate taxpayers are allowed to subtract the amount of
wage deduction disallowed under Section 280C(a) as it pertains to the Employee
Retention Credit as provided in IITA Section 203(b)(2)(I)(ii). This subtraction is
available on the 2021 Schedule M Other Additions and Subtractions (for
businesses), Step 3, Line 16d “expenses related to certain federal credits.”
As stated above, this is a GIL. A GIL does not constitute a statement of
Department policy that applies, interprets or prescribes the tax laws, and it is not
binding on the Department.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)