Employee Retention Credit on Form 1065

Can you provide more insight on filing a 1065 return for a dissolved partnership. This is what I gathered from AI which I know is not always reliable but it addresses how to handle when a partnership has been dissolved as it was sold on 10/31/24 and the ERC was filed in 2022 and not received by the IRS until Sept 2025 in the partnership name. 

IRS Tax Benefit Rule Guidance (Closed Tax Years / Late Refunds)

If the 2021 tax year is closed by the statute of limitations or amending the 2021 Form 1065 is no longer possible, updated IRS FAQs permit using the Tax Benefit Rule:

• If the partnership entity is dissolved: If the partnership formally dissolved and ceased to exist before 2025, it generally cannot file a 2025 Form 1065. However, if the refund check was issued to the former partnership or distributed directly to the former partners, the income from the recovery of the prior wage deduction passes through to the former partners based on their ownership percentage at the time of dissolution or during the credit period (2021).

• Reporting on 1040: Under the tax benefit rule, the former partner(s) would report their share of the overstated wage expense as other income on Schedule 1 (Form 1040) in 2025 (the year the check was received).

3. Deductibility of Professional Fees Paid to Obtain the ERC

Fees paid to a third party (e.g., $4,000) to assist in applying for and securing the credit are generally deductible as ordinary and necessary business expenses (under IRC Section 162):

• If paid or accrued in 2025, the partner or successor entity would recognize the fee expense in 2025 to offset the income, resulting in a net addition to income.

Key Summary

• Do not simply report the gross ERC award on a 2025 Schedule C/E without evaluating 2021. Standard IRS policy dictates amending the 2021 Form 1065 to issue amended K-1s for the 2021 partners.

• If 2021 cannot be amended, report the net recovery under the Tax Benefit Rule in 2025 on the partner's Form 1040, allocated according to the partners' historical ownership shares.

The partnership sold its assets to another law firm as they could not stop the bleeding of losses since 2021. I am not going to go into all the details, but one partner (out of 2) was taking large distributions from the business as well despite the losses of which I did not do that partner’s tax filings. The law firm that purchased this partnership primarily for their telephone number and leased space as the tangible assets were of minimal value. The buyer was not interested in taking on the debt of the partnership and the ERC residual money was to be used to be applied to the partnership’s debt. The losses from the business carryforward on the partner’s individual tax filing into 2025. The ERC check was deposited into the business bank account which still has remained open while the partner works down the debt. The other partner (not my client) filed bankruptcy and was no longer involved in the partnership minimally in 2024 and left the other partner (my client) to handle the sale and took no responsibility for the O/S debt to the CC company and SBA loan which is pretty significant ($600K). It is pretty much of a cluster……. My client was too nice and shouldered the debt of the business to try to make it work but inevitable it was a real drain not to mention my client put additional money into the firm to keep it going. 

And, if it is a BBA Partnership they would need to file an Administrative Adjustment Request instead on an amended return.

I am not planning on filing a 2025 partnership return.

I appreciate all the feedback as it has been very informative. I will work with the client, and we will determine the best course of action and disclose to the IRS whatever the direction taken is.

Why is everything always so complicated nor makes complete business sense……….