The IRS has issued a safe harbor allowing employers to exclude certain items from their gross receipts solely for determining eligibility for the employee retention credit (ERC). Eligible employers may claim the credit against employment taxes equal to a percentage of qualified wages paid to employees beginning after March 12, 2020 and ending on December 31, 2021. The American Rescue Plan Act of 2021 modified the employee retention credit first created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act then extended and expanded under the Consolidated Appropriations Act, 2021. This highly popular employment tax credit is designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits through the Coronavirus economic emergency.
The gross receipts that can be excluded solely for the determining eligibility for the ERC are as follows:
- the amount of forgiveness of a Paycheck Protection Program (PPP) Loan;
- the amount of the Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
- the amount of the Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.
Certain employers may be eligible for an employee retention credit (ERC) against applicable federal employment taxes if their gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter. For purposes of determining eligibility to claim the ERC for an employer other than a tax-exempt organization, gross receipts include:
- total sales (net of returns and allowances);
- all amounts received for services; and
- any income from investments and from incidental or outside sources.
Applying the safe harbor consistently. Employers must apply the safe harbor consistently for determining eligibility for the ERC. The employer must exclude the amounts from their gross receipts for each calendar quarter in which gross receipts are relevant to determining eligibility to claim the ERC. The employer claiming the credit must also apply the safe harbor to all employers treated as a single employer under the aggregation rules.
Claiming the ERC. An employer elects to apply the safe harbor by excluding these amounts solely for determining whether it is an eligible employer for a calendar quarter for purposes of claiming the ERC on its employment tax return or an adjusted employment tax return. An employer must retain in the employer’s records support for the credit claimed, including the use of the safe harbor. Additionally, an employer is not required to apply this safe harbor and the safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.
Please contact the Crosslin tax team at (615) 320-5500 to discuss the employee retention credit and how the safe harbor for excluding certain gross receipts may apply to your situation.