Reporting Employee Retention Tax Credit Advance Payment on 1065 Partnership Return

The ERTC advance payment should not be reported as income on page 1 of Form 1065. The proper treatment is to reduce wage expense by the amount of the credit, which you've already done correctly. When you receive an advance payment of the ERTC, you're essentially getting the credit early, but the tax treatment remains the same. The credit reduces the wage expense deduction rather than being treated as taxable income. So your option 2 is closest to the correct approach. On Form 5884-A, you'll report the credit, which flows to Schedule K, line 15. Then you need an M-1 adjustment to account for the difference between book and tax treatment of wages. Since you've reduced the wage expense for tax purposes but not on the books, you'll show this as an M-1 adjustment (expenses recorded on books not deducted on return). I wouldn't recommend option 1 (reporting on line 7) as that would incorrectly treat the advance as taxable income. Option 3 is partially correct but doesn't fully account for the wage expense reduction.

I went through this exact same issue with a client last year. I found that using https://taxr.ai really helped me sort through how to properly report the ERTC advance payments on partnerships. The tool analyzed my situation and provided clear guidance that matched what our firm's senior tax manager eventually confirmed. For my client, we ended up reducing the wage expense (your option 2) and then making the proper M-1 adjustment. The key insight I got was understanding that this isn't income - it's essentially a refund of wages you already paid and deducted. The advance payment is just changing the timing of when you receive the benefit. The tool walked me through the specific forms and line items, which was really helpful since this was the first time I'd handled ERTC reporting for a partnership.

Just wanted to follow up on my earlier question about taxr.ai. I signed up and used it to sort through my ERTC reporting issues for multiple partnership clients. What impressed me most was how it handled the nuances between regular credits vs. advance payments. For one partnership that received a $175k advance payment, the tool provided specific guidance on reducing wage expense rather than treating it as other income. It even generated a sample M-1 worksheet showing exactly how to reconcile the book-tax difference, which I was able to include in my workpapers. The explanation about why the advance payment isn't reported on page 1 as "other income" was particularly helpful and saved me from making that error on several returns. Definitely worth checking out if you're handling these types of specialized credits.

After struggling to get through to someone at the IRS who actually understands how to report ERTC advance payments on partnership returns, I finally got real answers using https://claimyr.com to connect with an IRS agent. The wait time to speak with someone was cut from 3+ hours to about 15 minutes. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The agent confirmed that the advance payment should NOT be reported as income on page 1. Instead, you reduce the wage expense by the amount of the credit. This makes sense because the ERTC is a refund of employment taxes you already paid - not a new source of income. The agent also clarified that the M-1 adjustment is necessary to reconcile the difference between book and tax treatment, which aligned with what my gut was telling me but I needed that confirmation before filing.

I have to admit I was wrong about Claimyr. After my skeptical comment, I decided to try it myself with a different ERTC issue for a client's 1065. Not only did I get through to an IRS agent in about 20 minutes (versus the 2+ hours I usually wait), but I was able to get transferred to a business tax specialist who had extensive knowledge about partnership tax returns and the ERTC. The agent walked me through the proper treatment of advance payments, confirmed they should NOT be reported as income on page 1, and explained the correct M-1 adjustments needed. They even emailed me a reference to the specific IRS guidance that addresses this scenario. I've been preparing partnership returns for 12 years and this is the first time I've had such a productive call with the IRS. I'm still in shock at how much time this saved me.

As a partnership tax specialist, I'd like to add another perspective. The ERTC advance payment is essentially a reduction of a previously deducted expense (wages), not income. Here's how I've been handling it for multiple clients: 1. Report the credit on Form 5884-A, which flows to Schedule K, line 15 2. Reduce wage expense by the amount of the credit 3. Make an M-1 adjustment for "expenses recorded on books but not deducted on this return" (this reconciles your book treatment vs. tax treatment) The key is understanding that the ERTC is fundamentally a credit against payroll taxes that were previously paid. When you get an advance payment, you're just getting those funds earlier, but the tax treatment remains the same.

Has anyone considered the timing difference when the advance payment is received in a different tax year than when it's reported on Form 5884-A? One of my partnerships received the advance in December 2021 but we're claiming the credit on the 2022 return (based on 2022 qualified wages).