IRS issues employee retention credit gross receipt exclusion procedure
TAX ALERT Â |Â
Authored by RSM US LLP
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.Â
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.Â
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.Â
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.Â
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.
This article was written by AnneÂ Bushman, KarenÂ Field, RyanÂ Corcoran , MaureenÂ Hansen and originally appeared on 2021-08-11.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP 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. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Gallagher, Flynn & Company, LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Gallagher, Flynn & Company, LLP can assist you, please call (802) 863-1331.