The IRS released a safe haven Tuesday that allows an employer to foreclose certain amounts received from other coronavirus economic assistance programs to see if they qualify for the Employee Loyalty Loan (ERC) based on a decline of gross income (Rev. Proc. 2021-33).
The amounts that can be excluded from the calculated gross income are:
- Paycheck Protection Program (PPP) loan forgiveness;
- Grants for operators of shuttered venues under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, part of the Consolidated Appropriations Act, 2021, PL 116-260; and
- Restaurant Revitalization Fund grants under the American Rescue Plan Act, PL 117-2.
The calculation of gross earnings is important because an employer may be eligible for the ERC if their gross earnings for a calendar quarter decrease by a certain percentage compared to a previous calendar quarter. While the amounts received from the other coronavirus relief programs listed above are already excluded from an employer’s gross income, they must be included in its gross earnings unless the Safe Harbor is used, the IRS said.
According to the IRS, the safe haven is required because Congress intended that employers could participate in these other coronavirus economic assistance programs while also claiming the ERC, provided the same wage dollars paid or reimbursed with other assistance program funds are not considered to be qualifying Treated wages as defined by the ERC. Without the safe haven, the IRS noted, an employer could be prevented from claiming an ERC “just because of its participation in the [other] The relief program led to a temporary increase in gross income within the meaning of the tax law. “
The safe haven
Under Safe Harbor, an employer may exclude the amount of PPP Loan Allocation, Shuttered Venue Operators Grants, and Restaurant Revitalization Fund Grants in determining eligibility to use the ERC for a calendar quarter if the employer consistently applies that Safe Harbor in determining eligibility to claim the ERC. An employer uses this safe haven consistently if he:
(1) excludes the amount from its gross income for each calendar quarter in which the gross income for that calendar quarter is relevant to determining eligibility for the ERC; and
(2) Applies the Safe Harbor to all employers who are treated as a single employer under the ERC aggregation rules.
So choose the safe haven
An employer chooses to use the safe haven by excluding the amounts received through the coronavirus assistance programs listed above from their gross earnings if they have eligibility to claim the ERC in their income tax return or adjusted income tax return for it Calendar quarter (or for employers who submit annual income tax returns for the year including the calendar quarter).
The Safe Harbor applies to determining eligibility to use the ERC for wages paid after March 12, 2020 and before January 1, 2022. An employer must keep records to substantiate the credit claimed, including use of this safe harbor.
The safe haven does not allow these amounts to be excluded from gross receipts for other federal tax purposes, the IRS noted.
– Dave Strausfeld, JD, ([email protected]) is Senior Editor at JofA.