New safe harbor for ERC gross-receipts calculation

Editor: Paul Bonner

The IRS issued a safe harbor that allows an employer to exclude certain amounts received from other coronavirus economic relief programs in determining whether it qualifies for the employee retention credit (ERC) based on a decline in gross receipts (Rev. Proc. 2021-33).

The amounts that can be excluded in calculated gross receipts are:

• The forgiveness of Paycheck Protection Program (PPP) loans;
• Shuttered Venue Operators Grants (SVOGs) under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, part of the Consolidated Appropriations Act, 2021, P.L. 116-260; and
• Restaurant Revitalization Fund (RRF) grants under the American Rescue Plan Act, P.L. 117-2.

The way in which gross receipts are computed is important because an employer may be eligible for the ERC if its gross receipts for a calendar quarter decline by a certain percentage as compared with a prior calendar quarter. While the amounts received from the other coronavirus relief programs listed above already are excluded from an employer’s gross income, they must be included in its gross receipts unless the safe harbor is used, the IRS said.

According to the IRS, the safe harbor is needed because Congress intended that employers be able to participate in these other coronavirus economic relief programs and simultaneously claim the ERC, provided that the same wage dollars that are paid for or reimbursed with other relief program funds are not treated as qualified wages for purposes of the ERC. Without the safe harbor, the IRS noted, an employer might be precluded from claiming an ERC “solely because its participation in the [other] relief program resulted in a temporary increase in gross receipts within the meaning of the tax law.”

The safe harbor

Under the safe harbor, an employer may exclude from its gross receipts the amount of PPP loan forgiveness, SVOGs, and RRF grants 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 if it:

1. Excludes the amount 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. Applies the safe harbor to all employers treated as a single employer under the ERC aggregation rules.

How to elect the safe harbor

An employer elects to use the safe harbor by excluding from its gross receipts the amounts received through the coronavirus relief programs listed above 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).

The safe harbor applies for purposes of determining eligibility to claim the ERC for wages paid after March 12, 2020, and before Jan. 1, 2022. An employer must retain records to support the credit claimed, including the use of this safe harbor.

The safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose, the IRS noted.