If your business is finally receiving an Employee Retention Credit refund in 2026 for wages you paid back in 2020 or 2021, there is a planning point worth knowing before you file.
A quick refresher on why this gets messy. The Employee Retention Credit was a COVID-era payroll tax credit for businesses that kept employees on during 2020 and 2021. Claiming it usually meant amending old payroll tax returns, and the rule is that you reduce your wage deduction for the year the wages were paid, not the year the cash finally shows up. So a refund arriving in 2026 can send you back to your 2020 or 2021 returns, and if those years were already amended, the income side and the deduction side can land in different years. On top of that, any interest the IRS pays you on a late refund is itself taxable in the year you receive it.
Many businesses filed their ERC claims years after their original returns, and because the IRS took so long to process them, some refunds are only arriving now, long after those tax years closed. The IRS currently lets you report the ERC refund as taxable income in the year you receive it, so reporting it on your 2026 return follows the guidance and avoids picking a fight with the IRS.
At the same time, you may want to protect your position. Some tax professionals think the IRS view could eventually be rejected by the courts, and if that happens, taxpayers who paid tax on their refunds may be owed money back. One clean way to keep that door open is to file a protective refund claim after you report the income on your 2026 return. You stay compliant today while preserving the right to recover the tax if the law shifts in your favor later.
It is worth knowing what a protective claim actually does. Refund claims come with a filing deadline tied to when you filed and paid your return. A protective claim is essentially a placeholder filed before that deadline that preserves your right to a refund while an unresolved question, here the durability of the IRS timing position, works itself out. It does not cost you tax today. It simply keeps you from being time-barred later, so if the rules shift in taxpayers’ favor you are still eligible to recover rather than locked out. On a genuinely unsettled issue, that is inexpensive insurance.
What this means for you: If an ERC refund is landing this year, let us report it correctly and file a protective claim at the same time. It is a small step now that could matter a lot if the courts weigh in.
