August 12, 2021
The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued a safe harbor (Revenue Procedure 2021-33
) on August 10 allowing employers to exclude certain items from their gross receipts solely for determining eligibility for the Employee Retention Credit (ERC).
Items covered by the safe harbor are:
- The amount of the forgiveness of a PPP loan.
- A grant from the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.
- A restaurant revitalization grant under the American Rescue Plan Act.
An employer that receives a PPP Loan may claim the ERC available to it for the calendar quarter, subject to the restriction that the qualified wages may not be counted both for the ERC and as payroll costs paid during the covered period to the extent the payroll costs qualify the eligible employer for PPP loan forgiveness.
Generally, shuttered venue operator grant funds may be used for some qualifying expenses, including certain payroll costs. It does not include qualified wages considered in determining the ERC under the CARES Act. Collectively, these two grants are referred to as “ERC Coordinated Grants.” An employer that receives an ERC Coordinated Grant may claim the ERC available to it for the calendar quarter. Qualified wages may not be counted both for the ERC and as payroll costs in connection with an ERC Coordinated Grant.
Definition of Gross Receipts for ERC Purposes
Generally, “gross receipts” are the gross receipts of the taxable year in which such receipts are properly recognized under the taxpayer's accounting method used in that taxable year for Federal income tax purposes. For purposes of the ERC, gross receipts include total sales, net of returns and allowances, and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources, regardless of whether that income is included in the taxpayer’s gross income.
In the case of a tax-exempt organization, “gross receipts” are the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting those amounts. Generally, for a tax-exempt organization, “gross receipts” includes, but is not limited to the gross amount received:
- As contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting those amounts.
- As dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of those amounts.
- From gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T, Exempt Organization Business Income Tax Return).
- From the sale of assets without reduction for cost or other basis and expenses of sale.
- As investment income, such as interest, dividends, rents, and royalties.
In determining its gross receipts, a tax-exempt organization should generally use the same accounting method that it regularly uses to keep its books and records.
ERC Gross Receipts Safe Harbor
Although the amount of forgiveness of a PPP Loan is not included in gross income, that forgiveness amount would be included in gross receipts. Similarly, the amount of an ERC-Coordinated Grant received by a taxpayer is not included in gross income, but the amount would be included in gross receipts. Therefore, unless an employer uses the safe harbor, the employer must include the amount of the forgiveness of a PPP Loan and the amount of any ERC-Coordinated Grants in gross receipts for determining eligibility to claim the ERC with respect to applicable calendar quarters in 2020 and 2021.
An employer that participated in one or more of the relief programs and that otherwise has the requisite percentage decline in gross receipts might be precluded from claiming an ERC in a calendar quarter in which there is the decline in gross receipts solely because its participation in the relief program resulted in a temporary increase in gross receipts within the meaning of the tax law. Accordingly, this revenue procedure provides a safe harbor that permits an employer to exclude the amount of the forgiveness of a PPP Loan and the amount of ERC-Coordinated Grants from the definition of gross receipts solely for the purpose of determining eligibility to claim the ERC (safe harbor).
An employer is not required to apply this safe harbor. This safe harbor does not permit the exclusion of the amount of forgiveness of a PPP Loan or the amount of ERC Coordinated Grants from the definition of gross receipts for any other Federal tax purpose.
Application of the Safe Harbor
An employer may exclude the amount of the forgiveness of a PPP Loan and the amount of any ERC Coordinated Grants from its gross receipts in determining eligibility to claim the ERC for a calendar quarter if the employer consistently applies this safe harbor in determining eligibility to claim the ERC. An employer consistently applies this safe harbor by:
- Excluding the amount of the forgiveness of any PPP Loan and the amount of any ERC Coordinated Grant from its gross receipts for each calendar quarter in which gross receipts for that calendar quarter are relevant to determining eligibility to claim the ERC.
- Applying the safe harbor to all employers treated as a single employer under the ERC aggregation rules.
Electing the Safe Harbor
An employer elects to use the safe harbor by excluding the amount of the forgiveness of a PPP Loan and the amount of ERC Coordinated Grants from its gross receipts when determining eligibility to claim the ERC on its employment tax return or adjusted employment tax return for that calendar quarter or, for employers that file employment tax returns on an annual basis, for the year including the calendar quarter.
An employer may revoke its safe harbor election by including the amount of the forgiveness of the PPP Loan or the amount of ERC Coordinated Grants in its gross receipts when determining eligibility to claim the ERC for a calendar quarter on its adjusted employment tax return for that calendar quarter or, for employers that file employment tax returns on an annual basis, for the year including the calendar quarter. The employer must adjust all employment tax returns that are affected by the revocation of the safe harbor election.