The IRS has just released instructions on this. It can be found on page 17 of the instructions for form 1120S. This idea would apply to filers of forms 1065 and 1120, and Sc C and Sch F, as well. The instruction says:
“Do not reduce your deduction for social security and Medicare taxes by the following amounts claimed on the employment tax returns: (1) the nonrefundable and refundable portions of the new CARES Act employee retention credit, and (2) the nonrefundable and refundable portions of the new FFCRA credits for qualified sick and family leave wages.
Instead, item (1) reduces your deduction for wages on lines 7 and 8, and item (2) must be reported as income on line 5.”
You can access the instruction here:
https://www.irs.gov/pub/irs-pdf/i1120s.pdf
This means that you will reduce the reported wages paid by the amount of ERTC.
You will report the Qualified Sick & Family leave credit as additional, “Other” income. Employers with significant amounts of ERTC, we will need to do some tax planning to account for the additional net profit of the business.
The IRS instruction does not indicate which year tax return you need to report the ERTC on.
In my opinion, this increase in “reported income” will not raise income for the purpose of determining eligibility for PPP, EIDL grant, or any other stimulus. We can refer to the SBA and IRS definitions of “gross receipts” for that interpretation.