We claimed the Employee Retention Credit years ago without reducing our wage deduction, and the IRS is only now letting us recognize the overstated wages as income in the year we actually receive the credit -- can we take Illinois's offsetting subtraction in that same later year instead of the original wage year?

Plain-English summary

An accountant asked the Department to confirm the TIMING of Illinois's offsetting subtraction for the federal Employee Retention Credit (ERC). Under federal law, claiming the ERC requires reducing the wage-expense deduction by the credit amount (IRC § 280C(a)) in the year the qualifying wages were paid. Illinois already allows corporations to subtract that same disallowed wage amount on their Illinois return (IITA § 203(b)(2)(I), confirmed in the Department's 2022 letter IT-22-0001-GIL).

The timing problem. Some taxpayers filed retroactive ERC claims without amending their federal returns to reduce wage expense, because it wasn't yet certain the IRS would approve the claim. The IRS later updated its ERC FAQs to let these taxpayers avoid amending the original year's return: instead, they can recognize the overstated wage expense as additional gross income in the LATER year the ERC claim is actually approved and paid. The accountant asked whether Illinois's offsetting subtraction could likewise be claimed in that same later year, rather than the original wage year.

Why this isn't automatic. Ordinarily, the Illinois subtraction is tied to the same year the wage deduction is disallowed and the credit is claimed -- not a later year. Separately, federal tax law has a "tax benefit rule" (IRC § 111(a)) that generally excludes from income a later recovery of a previously-deducted amount that didn't reduce tax in the earlier year, but the Illinois Income Tax Act has no equivalent provision, and § 203(h) specifically bars any subtraction based on an unlegislated rule like this. So, absent something more, a later-year income pickup wouldn't by itself create a new Illinois subtraction in that later year.

Why the Department made an exception here. Because the IRS's own verification process (driven by a moratorium on new ERC claims from September 2023 to January 2024, and heightened fraud-review procedures) effectively delays when the wage disallowance becomes final until the credit is actually approved and received, the Department agreed to align Illinois's subtraction timing with the IRS's own updated FAQ procedure. If an ERC claim is approved and paid in a tax year LATER than the year originally claimed, and the taxpayer did not reduce wage expense in that earlier year, the Department will allow the corporation (or other taxpayer type, under the IITA's parallel provisions) to claim the IITA § 203(b)(2)(I)(ii) subtraction in the SAME tax year it reports the overstated wage expense as gross income on its federal return.

Documentation required. This treatment is subject to Department verification. Taxpayers must be able to show the wage-expense deduction and ERC claimed on the original return, the tax year the ERC was actually received, the ERC amount paid by the IRS, and the overstated wage deduction amount included as gross income for the year the ERC was received.

What this means for you

Employers with pending or recently-approved ERC claims

If you claimed the ERC on an amended return without reducing your original wage-expense deduction, and the IRS is now having you recognize the wage overstatement as income in the year the credit is actually paid, you can claim Illinois's offsetting subtraction in that same later year -- you don't need to separately amend the original wage-expense year on your Illinois return.

Accountants reconciling ERC claims across multiple tax years

Keep clear documentation linking the original wage/ERC claim amounts to the specific later year the credit was approved and received -- the Department will verify this before accepting the shifted-year subtraction.

Businesses that already amended their original-year federal and Illinois returns

This letter addresses taxpayers who did NOT reduce wage expense in the original year and are instead following the IRS's newer recognize-it-later approach -- if you already amended the original year, this specific timing accommodation may not be the relevant path for you.

Common questions

Q: Does Illinois's ERC wage-expense subtraction normally follow the same year as the wages were paid?
A: Yes, ordinarily -- the subtraction is tied to the year the wage deduction is disallowed and the ERC is claimed.

Q: Why doesn't Illinois's general "no tax benefit rule" provision block this later-year treatment?
A: Because the Department is specifically aligning with the IRS's own administrative correction procedure for ERC claims in this narrow situation, not applying a general federal tax-benefit-rule exclusion that Illinois otherwise doesn't recognize.

Q: What proof does the Department require to allow the later-year subtraction?
A: Documentation showing the original wage-expense deduction and ERC amount claimed, the tax year the ERC was actually received, the ERC amount the IRS paid, and that the overstated wage expense was reported as gross income for that same later year.

Q: Does this apply to businesses other than corporations?
A: Yes -- the letter notes that taxpayers other than corporations may claim the parallel subtraction modification under the IITA's substantially identical provisions for other entity types.

Citations and references

Statutes and guidance:

• 35 ILCS 5/203(b)(2)(I) (ERC-related wage-disallowance subtraction)
• 35 ILCS 5/203(h) (no modifications beyond those expressly provided)
• IRC § 280C(a) (wage-deduction reduction for the ERC)
• IRC § 111(a) (federal tax benefit rule)
• IT-22-0001-GIL (Illinois's 2022 GIL confirming the ERC subtraction)
• IRS Notice 2021-49; IRS ERC FAQs updated March 20, 2025

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2025/it25-0004-gil.pdf

Original ruling text

IT 25-0004-GIL 05/06/2025 INCOME TAX - SUBTRACTIONS
Subtraction modification may be claimed in the same tax year a taxpayer receives
the Employee Retention Credit and reports an overstated wage expense amount as
gross income on its federal return for the disallowed wage deduction. (This is a
GIL.)
May 6, 2025
NAME
COMPANY
EMAIL
Re:

Illinois Income Tax – Federal Employee Retention Credit and Illinois Subtractions

Dear NAME:
This letter is in response to your email dated April 7, 2025, in which you requested
information regarding the Federal Employee Retention Credit and the corresponding
Illinois subtractions. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer inquiries
concerning the application of a tax statute or rule to a particular fact situation. A PLR is
binding on the Department, but only as to the taxpayer who is the subject of the request for
ruling and only to the extent the facts recited in the PLR are correct and complete. Persons
seeking PLRs must comply with the procedures for PLRs found in the Department’s
regulations at 2 Ill. Adm. Code Section 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of
information regarding the topic about which they have inquired. A GIL is not a statement of
Department policy and is not binding on the Department. See 2 Ill. Adm. Code Section
1200.120(b) and (c). You may access our website at https://tax.illinois.gov/ to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
I am writing to confirm that the subtraction provided by Section 35 ILCS
5/203(b)(2)(I) for ERC related wages disallowed by IRC Section 280C would
apply in the year the credit is approved.
Illinois GIL IT-22-0001 confirms this treatment generally. It states, “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

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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).”
Some taxpayers filed retroactive ERC claims, yet did not amend their federal
returns to disallow the wages generating the credit due to the uncertainty as
to whether they would be approved. For taxpayers in this situation, the IRS
has recently issued updated FAQ’s. Rather than requiring such taxpayers to
amend prior year returns to reduce salary deductions which generated a
credit, the Department is allowing taxpayers to recognize the increase in
income in the year the credit is received.
If an ERC credit is approved and claimed in 2024 or thereafter, and an
increase in taxable income is recognized on the 2024 federal income tax
return (or relevant post 2021 tax year), will Illinois allow a subtraction for the
wages disallowed under Section 280C(a)?
Thank you for your assistance.
RULING
Section 203 of the Illinois Income Tax Act (“IITA”) [35 ILCS 5/101 et seq.] provides that a
taxpayer’s base income is equal to its federal taxable income (or adjusted gross income, in
the case of an individual taxpayer), modified as provided in that section. IITA Section 203(h)
provides:
Legislative intention. Except as expressly provided by this Section there shall
be no modifications or limitations on the amounts of income, gain, loss or
deduction taken into account in determining gross income, adjusted gross
income or taxable income for federal income tax purposes for the taxable
year, or in the amount of such items entering into the computation of base
income and net income under this Act for such taxable year, whether in
respect of property values as of August 1, 1969 or otherwise.
For corporations, IITA Section 203(b)(2)(I) currently allows a subtraction from federal
taxable 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

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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 taxexempt 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.
The Department issued a General Letter Ruling on February 23, 2022, allowing
corporations to subtract from federal taxable income the amount of federal wage
deduction disallowed under Internal Revenue Code (“IRC”) section 280C(a) as it pertains
to the Employee Retention Credit (“ERC”). (See IT-22-0001-GIL.) Taxpayers must generally
reduce their deduction for wage expense by the amount of the ERC in the taxable year in
which the qualified wages were paid or incurred. (See IRS Notice 2021-49.)
On March 20, 2025, the Internal Revenue Service updated its Employee Retention Credit
FAQs outlining the procedures on how to correct mismatched wage expenses. (See
Questions 1 – 3 under the “Income tax and ERC” section of the FAQs.) If a taxpayer
claimed the ERC but did not reduce wage expense on its income tax return, and the ERC
claim was paid in a subsequent tax year, the IRS will permit the taxpayer to adjust the wage
expense in the year the ERC claim is paid. The taxpayer is not required to file an amended
return, or if applicable, an administrative adjustment request to address the overstated
wage expenses. Rather, a taxpayer may include the overstated wage expense amount as
gross income on the income tax return for the taxable year in which the ERC was received.
The FAQs note that this amount is to be included in gross income due to the tax benefit
rule. The application of this rule corrects a taxpayer’s excess wage expense on the income
tax return for the tax year in which it received the ERC, rather than limiting corrections to
income tax returns for a prior year in which the ERC was claimed. Similarly, if a taxpayer’s
ERC claim was disallowed and the wage expense was reduced by the amount of ERC
expected on the income tax return for the year the ERC was claimed, the IRS will permit the
taxpayer to increase wage expense in the year the claim disallowance is final.
IRC section 111(a) deals with the recovery of certain items previously deducted:

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Gross income does not include income attributable to the recovery during
the taxable year of any amount deducted in any prior taxable year to the
extent such amount did not reduce the amount of tax imposed by this
chapter.
The IITA makes no express provision for a “tax benefit rule”. Accordingly, IITA Section
203(h) prohibits the allowance of any subtraction based on the tax benefit rule. As there is
no subtraction modification permitting corporations to exclude from Illinois base income
an amount included in federal taxable income pursuant to IRC Section 111 as a recovery of
an item of income previously deducted, such a deduction cannot be taken on the Illinois
return.
However, while the IRS ERC FAQs are not authoritative, the Department will recognize the
process as outlined by the IRS in this very limited situation. In general, the wage expense
deduction is disallowed in the year the qualified wages are paid or incurred and the related
credit is claimed federally. It is then that a taxpayer would be allowed to claim a
subtraction modification on its Illinois tax return for that same tax year. With regard to the
ERC, the IRS implemented processes to verify valid claims against potential fraud and
abuse of the credit and shifted the moratorium period on new claims from September 14,
2023, to January 31, 2024. The IRS has acknowledged that most claims showing an
increased risk of being incorrect needed additional review or information to confirm a
business’s eligibility for the credit. Therefore, the wage expense deduction is effectively
disallowed in the year the ERC is awarded by the IRS since that is when the credit has been
verified by the IRS and received by the taxpayer.
In consideration of the IRS guidance and verification process, if an ERC is approved and
paid by the IRS in a tax year subsequent to the tax year that the taxpayer originally claimed
the ERC and the taxpayer did not reduce the wage expense deduction for that tax year,
then the Department will allow a corporate taxpayer to claim a subtraction modification
pursuant to IITA Section 203(b)(2)(I)(ii), in the same tax year the taxpayer reported the
overstated wage expense amount as gross income on its federal return, for the amount of
the wage expense deduction that would have been disallowed under IRC section 280C(a)
on the originally filed federal tax return. Taxpayers other than corporations may claim the
subtraction modification as allowed in the substantially identical provisions in IITA Section

203. The subtraction modification is subject to Department verification. Upon request by
     the Department, taxpayers must provide support that the overstated wage expense
     amount was included as gross income on the federal income tax return for the taxable year
     in which the ERC was received by the taxpayer. This support includes, but is not limited to,
     documentation which clearly reflects the wage expense deduction and ERC claimed on
     the original return, the tax year in which the ERC was received by the taxpayer, the amount

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of the ERC paid by the IRS, and the overstated wage deduction amount included as gross
income for the tax year the ERC was received by the taxpayer.
As stated above, this is a General Information Letter. A General Information Letter does not
constitute a statement of Department policy that applies, interprets or prescribes the tax
laws, and it is not binding on the Department. If you require additional information, please
visit the Department’s website at https://tax.illinois.gov/ or contact the Department’s
Taxpayer Assistance Division at 800-732-8866.
Sincerely,
Jennifer Uhles
Associate Counsel
JU:se