In very welcomed news, the IRS released guidance allowing employers to exclude Paycheck Protection Program (PPP) loan forgiveness, Restaurant Revitalization Fund (RRF) grants, and Shuttered Venue Operator Grants (SVOG) from the Employee Retention Tax Credit (ERTC) gross receipts calculation.
Eligibility for the ERTC may be dependent on the relative reduction in gross receipts between periods (for more background on the ERTC, read our article here). For example, an employer that can demonstrate at least a 50% decline in gross receipts for a quarter in 2020 may be eligible. For 2021, the employer that can demonstrate at least a 20% decline in gross receipts may be eligible. To determine gross receipts, the ERTC requires employers to look to section 448(c) and Reg. section 1.448-1T(f)(2)(v) or section 6033 and Reg. section 1.6033-2(g)(4) depending on the classification of an entity.
In this recent revenue procedure, the IRS concluded that congressional intent was to allow employers to participate in the ERTC in conjunction with the aforementioned loan forgiveness or grant programs in the CARES Act and that including these items in gross receipts may preclude eligibility for some employers that would otherwise be eligible. As a result, the IRS issued a safe harbor election in Rev. Proc. 2021-33 to exclude PPP loan forgiveness and the relief grant amounts in the calculation of gross receipts for ERTC eligibility calculations.
These sections of the Internal Revenue Code and regulations would normally require the inclusion of tax-exempt income such as PPP loan forgiveness, restaurant revitalization grants, and shuttered venue operator grants. This exemption is only for the ERTC and does not change reporting for any other tax reporting purpose, including Form 990 reporting.
Election of safe harbor for ERTC gross receipts calculation
Employers that wish to elect the safe harbor method should consistently exclude amounts related to PPP loan forgiveness, RRF grants, and SVOGs from ERTC gross receipt calculations for all relevant periods. Additionally, all employers treated as a single employer under the ERTC aggregation rules for the employer must apply the safe harbor.
Employers are able to revoke this election, should they so choose, by adjusting all affected employment tax returns.
This safe harbor is only applicable to the ERTC gross receipts computation and only exempts PPP, RRF, and SVOG. Employers should determine if they received any other funding sources or other non-traditional items that should be included in ERTC gross receipts. For example, for tax-exempt entities, the ERTC credit amount itself was not eliminated from the gross receipt calculation.
The ERTC refund amount is not income to the employer but does cause a reduction in the tax deduction for the year in which the qualified ERTC wages are paid. Given the upcoming tax return deadlines for 2020, employers and their advisors need to determine ERTC credits for 2020 fairly soon to apply them to the tax return. Otherwise, the employer may have to amend the 2020 tax return to reduce the compensation tax deductions by the ERTC refund amount.
The guidance issued in Rev. Proc. 2021-33 is a continuation of recent guidance in regard to ERTC, including guidance released last week in Notice 2021-49 as discussed in our recent tax alert. Employers should contact their tax advisor for more information on ERTC and the safe harbor election.