Gross Receipts Safe Harbor Will Help Employers Qualify for Employee Retention Credit

(Parker Tax Publishing August 2021)

The IRS issued a safe harbor allowing employers to exclude certain items from their gross receipts solely for determining eligibility for the employee retention credit. The items covered by the safe harbor are: (1) the amount of the forgiveness of a Paycheck Protection Program (PPP) loan, (2) a grant under Section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, and (3) a restaurant revitalization grant under Section 5003 of the American Rescue Plan Act of 2021. Rev. Proc. 2021-33.

Background

As a result of the COVID-19 pandemic, numerous pieces of legislation were enacted to help individuals and businesses cope with the resulting loss of income and revenue. As originally enacted, Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows eligible employers, including tax-exempt organizations, that pay qualified wages after March 12, 2020, and before January 1, 2021, to claim an employee retention credit (ERC) against applicable employment taxes. Subsequently, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Tax Relief Act), which was enacted as part of the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021 (the ARP) extended the ERC though the end of 2021.

The ERC is available only to employers that are eligible employers for the applicable calendar quarters in 2020 and 2021. An employer may be eligible for the ERC if its gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter. The method used to determine if an employer is an eligible employer based on experiencing the requisite percentage decline in gross receipts varies depending on the calendar quarter for which the employer is determining its eligibility for the ERC.

Additionally, the Shuttered Venue Operators Grant (SVOG) program was established by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), and amended by the ARP. The program was established to provide over $16 billion in grants to shuttered venues. The ARP also established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. Recipients are generally not required to repay the grants from these programs. Together, the SVOG and RRF are referred to as "ERC-Coordinated Grants."

The CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, and the Economic Aid Act established the Paycheck Protection Program (PPP), which allows eligible recipients to obtain loans guaranteed by the Administrator of the Small Business Administration under Section 7(a)(36) of the Small Business Act (PPP First Draw Loans). Section 1109 of the CARES Act provides additional authority to permit certain lenders to participate in the PPP by making loans (Section 1109 Loans) that must be consistent, to the maximum extent practicable, with the terms and conditions for loans under the PPP. Section 311 of the Economic Aid Act authorized additional loans to be made to qualified entities (PPP Second Draw Loans). Recipients of PPP loans are eligible for forgiveness of all or a portion of the principal amount of the loan if certain conditions are met.

Initially, an employer who received a PPP loan was not allowed to take the ERC. Subsequently, that changed and an employer that receives a PPP loan may claim the ERC for a calendar quarter, subject to the restriction that deductible payroll costs are reduced by the amount of the ERC. No amount is included in the gross income of an eligible recipient or eligible entity, as applicable, by reason of the forgiveness of a PPP First Draw Loan, Section 1109 Loan, or PPP Second Draw Loan and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Similar rules apply to the receipt of ERC-Coordinated grants.

Gross Receipts

For purposes of determining eligibility to claim the ERC, other than in the case of a tax-exempt entity, "gross receipts" are defined by reference to Code Sec. 448(c). Reg. Sec. 1.448-1T(f)(2)(iv) generally provides that "gross receipts" are the gross receipts of the tax year in which such receipts are properly recognized under the taxpayer's accounting method used in that tax year for federal income tax purposes.

In the case of a tax-exempt organization determining eligibility to claim the ERC, "gross receipts" are defined by reference to Code Sec. 6033 and Reg. Sec. 1.6033-2(g)(4), which generally provides that "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.

On August 10, the IRS issued Rev. Proc. 2021-33. The procedure provides a safe harbor permitting employers to exclude certain amounts from gross receipts solely for determining eligibility for the ERC.

Rev. Proc. 2021-33

In Rev. Proc. 2021-33, the IRS notes that an employer that participated in one or more of the covid relief programs discussed above, and that otherwise has the requisite percentage decline in gross receipts, might be precluded from claiming an ERC with respect to a calendar quarter in which there is the decline in gross receipts solely because the employer's participation in the relief program resulted in a temporary increase in gross receipts within the meaning of the tax law. To ameliorate this result, Rev. Pro. 2021-33 provides taxpayers claiming the ERC with a gross receipts safe harbor. The safe harbor 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 and the 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 under Code Sec. 448(c) or Code Sec. 6033 for any other federal tax purpose.

An employer is eligible for the safe harbor if the employer consistently applies the safe harbor in determining eligibility to claim the ERC. An employer consistently applies this safe harbor by (1) 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, and (2) applying the safe harbor to all employers treated as a single employer under the ERC aggregation rules.

Compliance Tip: 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. Under a consistency rule in Rev. Proc. 2021-33, the employer must adjust all employment tax returns that are affected by the revocation of the safe harbor election.

For a discussion of the ERC, see Parker Tax ¶106,460.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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