Safe Harbor May Help Organizations Qualify for Employee Retention Credit

  • 8/12/2021
Board Meeting Discussion

The IRS issued Rev. Proc. 2021-33, stating that forgiveness amounts for PPP loans and ERC-Coordinated Grants do not have to be included in gross receipts for purposes of qualifying for the employee retention credit.

Key insights

  • The IRS issued Rev. Proc. 2021-33 to create a safe harbor so that organizations can more easily qualify for the employee retention credit under the gross receipts test.
  • PPP forgiveness, shuttered venue grants, and restaurant revitalization funds no longer need to be included in gross receipts when qualifying for the ERC.

Coordinate with an advisor to understand eligibility for the ERC and other programs.

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On August 10, the IRS issued Rev. Proc. 2021-33 to amplify information in the three notices related to employee retention credit (ERC) issued earlier this year. The Rev. Proc. also provides a safe harbor for treatment of PPP loan forgiveness and “ERC-Coordinated Grants” in defining gross receipts for purposes of qualifying for ERC.

What’s the big deal with a revenue procedure?

A revenue procedure is an official statement of a procedure published in the Internal Revenue Bulletin. It either affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code (IRC) and related statutes, treaties, and regulations, or — although not necessarily affecting the rights and duties of the public — should be a matter of public knowledge.

A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the IRC or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Now that we have more formal guidance in the form of Rev. Proc. 2021-33, we can rely more heavily on the positions we are taking related to the ERC.

What does it say?

Rev. Proc. 2021-33 reiterates the rules that payroll dollars utilized for PPP loan forgiveness may not be used for purposes of claiming the ERC. It also amplifies the rules set forth in the three notices (Notice 2021-20, Notice 2021-23, and Notice 2021-49) related to claiming the credit. The Rev. Proc. goes on to define shuttered venue grants and restaurant revitalization grants as “ERC-Coordinated Grants.”

Under the IRC Sections and regulations for 448(c) and 6033, gross receipts must still reflect those programs for tax purposes; however, the new Rev. Proc. states that including those program proceeds for purposes of ERC eligibility determination would be circular, and is therefore not required. The safe harbor created in this Rev. Proc. must be applied consistently in order to be considered valid. All recordkeeping requirements remain in effect.

What does it mean?

It’s good news! Prior to this Rev. Proc., the only available guidance was found in the IRC sections requiring an organization to include these funds in the gross receipts calculation, and in many cases, would render an organization ineligible to claim the credit. The Rev. Proc. removes that hurdle, and as long as the treatment remains consistent, organizations who need funds may now be eligible for the credit even if they would not have qualified under ordinary rules of construction.

Is there urgent action required?

Yes! If you now qualify for the ERC under the gross receipts test in 2020, you may want to get that calculation in place prior to filing your 2020 return under the extended filing deadlines. Remember that Notice 2021-49 requires you to add back the credit amount to your wage expense in each year you generate a credit. Acting now could save you from having to amend returns later.

How we can help

You may need additional support if your organization is audited during the extended timeframe allotted to the IRS to review these claims. Our CLA tax professionals can help you coordinate and assess your eligibility for the ERC and other programs, as well as document the circumstances giving rise to the credit.

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