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Revenue Procedure 2021-33, issued by the IRS on August 9, 2021, now answers one of our biggest Employee Retention Credit (ERC) questions: Are Paycheck Protection Program (PPP) loans included in gross receipts for ERC eligibility? Based on this guidance, the answer is NO.
ERC Eligibility Refresher
As a reminder, an employer is eligible for the ERC through one of three ways during 2021:
A full or partial suspension of operations due to a government order;
A gross receipts decline of over 20% when compared to the same quarter in 2019; or
Qualification as a Recovery Startup Business (2021 Q3 and Q4 only).
The gross receipts decline test is met by looking at the current quarter and comparing it with the same quarter in 2019. Alternatively, the prior quarter lookback method can be used in 2021, which compares the immediate prior quarter to that same prior quarter in 2019.
When calculating gross receipts, employers should use the same method of accounting used for their income tax return. This was clarified in Rev. Proc. 2021-33.
PPP Forgiveness, SVOG Funds, and RRF Grants are NOT Gross Receipts for ERC Purposes
Gross receipts are defined under section 448(c) for for-profit taxpayers and section 6033 for tax-exempt organizations. While the two code sections have minor differences, both essentially state that gross receipts include all forms of revenue, including tax-exempt income.
Under the Tax Relief Act of 2020, PPP loans and Shuttered Venue Operator Grants (SVOG) are not included in taxable income. Under the American Rescue Plan Act of 2021, Restaurant Revitalization Fund (RRF) grants are also not included in taxable income. However, many worried these items were included in gross receipts as tax-exempt income.
Under Rev. Proc. 2021-33, we have definitive guidance that these amounts are ordinarily included in gross receipts. However, a Safe Harbor is provided to exclude all three amounts when determining gross receipts for ERC eligibility.
Safe Harbor for Gross Receipts
Solely to determine ERC eligibility, an employer may exclude PPP loan forgiveness, SVOG funds, or RRF grants that it received during the year. If an employer applies this Safe Harbor, it must exclude all three types of relief funding (if applicable) for each calendar quarter when determining eligibility for the ERC. The use of the Safe Harbor is not required, but all employers will want to do so to boost their chances at being eligible for the ERC.
For employers treated as a single employer under the aggregation rules, all employers must use a consistent approach – either all utilize the Safe Harbor or none utilize it.
No formal election needs to be filed for the Safe Harbor. Instead, an employer is treated as electing to use it when it determines its eligibility for the ERC. The employer should keep records to support the gross receipts calculation and how the relief funds are not included in the gross receipts totals.
Once an election is made in a quarter, an employer may revoke it later. However, the election is subject to a consistency rule. This means that if an employer later includes the relief funds in the gross receipts calculation, it must go back and adjust all employment tax returns affected by the revocation of the Safe Harbor.
Please note that the gross receipts exclusion only applies to these three COVID relief programs – PPP loans, SVOG funds, and RRF grants. The various relief bills included many financial assistance programs, but not all of these funds are eligible for the gross receipts exclusion when determining ERC eligibility.
Planning Opportunities for Employers
Take Another Look at Prior Quarters
If an employer previously determined it was ineligible for the ERC due to including PPP loan forgiveness, SVOG funds, or RRF grants, it should go back and recalculate its gross receipts decline by excluding these amounts. We have seen many employers think they were ineligible for the ERC because they initially included these funds in the analysis. When the amounts were removed, they had a gross receipts decline that exceeded 20%, now making them ERC eligible.
Don’t Wait to Apply for PPP Loan Forgiveness
Previously we recommended waiting to apply for PPP loan forgiveness as we thought these amounts may be includible in the gross receipts calculation. We didn’t want employers hurting their own ERC eligibility by receiving PPP forgiveness in an otherwise ERC eligible quarter.
Now that PPP loan proceeds are not included in gross receipts, borrowers may apply for forgiveness whenever they are ready. This is a huge relief as many borrowers wish to have the loan off their books before their year-end.
This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.