IRS Issues New Safe Harbor For ERC
Earlier this month, the IRS issued a safe harbor that allows employers to exclude certain amounts received from pandemic economic relief programs when determining whether they qualify for the Employee Retention Credit (ERC) based on a decline in gross receipts. Amounts that can be excluded from the calculation of gross receipts include:
- Forgiveness of Paycheck Protection Program (PPP) loans
- Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
- Restaurant Revitalization Fund grants under the American Rescue Plan
It is important to calculate gross receipts since an employer may be eligible for the ERC if the gross receipts for a calendar quarter declines by a certain percentage compared to a prior calendar quarter. While the amounts received from other pandemic relief programs above are excluded from an employer’s gross income, they have to be included in its gross receipts, unless safe harbor is used. According to the IRS, the safe harbor is needed because Congress intended that all employers could partake in the other relief programs while claiming the ERC. This is done by assuring that the same wage dollars are paid for or reimbursed with other relief program funds and are not treated as qualified wages for purposes of the ERC.
What is the safe harbor? The safe harbor allows employers to exclude other economic relief funds from their gross receipts to determine eligibility to claim the ERC for a calendar quarter. Employers may consistently apply this safe harbor if they:
- Exclude the amount from its gross receipts for each calendar quarter in which gross receipts for that calendar quarter are relevant to determining eligibility to claim the ERC; and
- Apply the safe harbor to all employers treated as a single employer under the ECR aggregation rules.
How do you elect the safe harbor? To do this, an employer must exclude the amounts received through relief programs listed above from its gross receipts when determining eligibility to claim the ERC on its employment tax return or adjusted employment tax return that calendar quarter. Employers may also file employment tax returns on an annual basis for the year including the calendar quarter.
The safe harbor is to be applied for the purposes of determining eligibility to claim the ERC for wages paid after March 12, 2020, and before January 2, 2022. Employers must retain records to support the credit claimed, including the use of the safe harbor. The safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.
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