A new safe harbor unveiled by the Internal Revenue Service and the Treasury Department lets employers exclude some items from their gross receipts when figuring if they are eligible for the Employee Retention Credit, or ERC.
This new safe harbor is detailed in Revenue Procedure 2021-33 and allows employers to exclude these amounts when calculating ERC eligibility:
- The amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
- Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
- Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.
Employers have to determine whether they qualify to claim the ERC on their quarterly employment tax return. To claim the safe harbor, they only have to leave those specific amounts out of the calculations.
The IRS reminds that when it comes to determining an employer’s eligibility for the ERC, the revenue procedure requires the safe harbor to be applied consistently across all quarters where the retention credit is relevant.
There’s also an all-or-none kind of rule when applying the safe harbor. In situations where several employers are treated as a single employer by aggregation rules, the employer claiming the credit has to apply the safe harbor to the others.
Conversely, employers aren’t required to use the safe harbor and the specified amounts can’t be excluded for any purpose other than calculating ERC eligibility.
The IRS is expanding their guidance
Revenue Procedure 2021-33 updates and expands guidance originally handed down in these publications:
- Notice 2021-20, detailing the ERC in terms of qualified wages paid after March 12, 2020, and before Jan. 1, 2021;
- Notice 2021-23, addressing the ERC relating to qualified wages paid after Dec. 31, 2020, and before July 1, 2021; and
- Notice 2021-49, which applies to qualified wages paid after June 30, 2021 and before Jan. 1, 2022.
To claim the ERC on their regular quarterly employment tax return, employers generally use Form 941, Employers Quarterly Federal Tax Return. If filing an adjusted return, Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund is generally used.
There may yet be more to come on the safe harbor for the Employee Retention Credit. Both the IRS and the Treasury Department say they are watching for new legislation and promise to update resources when it’s available.