IRS eases burden on ERC eligibility under gross receipts test

On Aug. 10, 2021, the IRS released Rev. Proc. 2021-33, providing a taxpayer-friendly safe harbor that permits an employer to exclude certain items from “gross receipts,” solely when determining employee retention credit (ERC) eligibility. For many employers, application of this safe harbor could be significant.

The items covered by the safe harbor are:

1. Paycheck Protection Program (PPP) loans forgiven, and
2. “ERC-Coordinated Grant” amounts received, limited to:
   a. Shuttered venue operator grants, and
   b. Restaurant revitalization grants

Background

In general, amounts received with a forgiven PPP loan or ERC-Coordinated Grant are included in the calculation of gross receipts (although they are excluded from gross income). Prior to the safe harbor, employers who received one or more of these benefits were required to include those amounts in their quarterly revenue when testing for eligibility under the significant decline in gross receipts test. For many employers, this inclusion pushed them past the threshold of eligibility, rendering them ineligible or causing them to rely on the less-favorable suspension test.

The IRS commented in Rev. Proc. 2021-33 that it believes congressional intent is that an employer should be able to participate in the PPP and ERC-Coordinated Grant relief programs and also claim the employee retention credit. However, the IRS further states that without the safe harbor, participation in these programs might preclude an employer from claiming the ERC with respect to a calendar quarter in which there is the decline in gross receipts solely because its participation in the relief program resulted in a temporary increase in gross receipts.

Accordingly, the IRS provided a safe harbor that permits an employer to exclude the amount of the forgiveness of a PPP loan and the amount of ERC-Coordinated Grants from the definition of gross receipts, solely for the purpose of determining eligibility to claim the ERC.

Application of the safe harbor

An employer may elect to use the safe harbor by simply excluding the amount of the forgiveness of a PPP loan and the amount of ERC-Coordinated Grants from its gross receipts when determining eligibility to claim the ERC on its employment tax return. No election statement is needed.