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IRS Offers Safe Harbor for Employers Using Retention Credit

Posted on Aug. 11, 2021

New IRS guidance will allow employers to exclude some items from their gross receipts to be able to claim the employee retention credit provided in coronavirus pandemic response laws.

Rev. Proc. 2021-33, 2021-34 IRB 1, provides a safe harbor under sections 448 and 6033 that permits the gross receipts exclusion of amounts involving the forgiveness of Paycheck Protection Program loans; shuttered venue operators grants received under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; and restaurant revitalization grants received under the American Rescue Plan Act of 2021 (P.L. 117-2).

Issued August 10, Rev. Proc. 2021-33 explains that although the amount of forgiveness of a PPP loan or an ERC-coordinated grant received by a taxpayer isn’t included in gross income, it would be included in gross receipts. If employers choose not to use the optional safe harbor, they must include those amounts in their gross receipts.

The guidance requires that employers consistently apply the safe harbor by excluding eligible items for each calendar quarter that are relevant in the determination of an employer’s eligibility for the ERC. It notes that an employer may be eligible for the ERC if its gross receipts for a calendar quarter decline by a specific percentage as compared with the prior calendar quarter.

Under aggregation rules, an employer must apply the safe harbor exclusion to all employers that are treated as a singular employer.

Rev. Proc. 2021-33 is the latest in a string of ERC guidance, following Notice 2021-20, 2021-11 IRB 922, which dealt with qualified wages paid after March 12, 2020, and before January 1, 2021; Notice 2021-23, 2021-16 IRB 1113, which covered rule changes during the first two calendar quarters of 2021; and Notice 2021-49, 2021-34 IRB 1, which covered changes during the second two calendar quarters of 2021.

The ERC was originally enacted in the Coronavirus Aid, Relief, and Economic Security Act and applied through the end of 2020. The credits were extended through the first and second quarters of 2021 in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and extended further through the third and fourth quarters of 2021 in ARPA.

Treasury and the IRS said in a release that they will continue to monitor pending ERC legislation and will provide additional updates as needed.

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