The IRS and the Treasury issued a safe harbor to the employers, allowing them to exclude certain items from their gross receipts solely to determine eligibility for the Employee Retention Credit (ERC).
Revenue Procedure 2021-33 PDF permits the employers to exclude the amounts given below solely to claim employee retention tax credit:
If they wish to use it, the employers are required to apply the safe harbor consistently. The employer must exclude the amounts from their gross receipts for every corresponding quarter.
However, an employer does not necessarily have to apply this safe harbor. Also, these amounts cannot be excluded from gross receipts for any other tax-related purposes. The safe harbor applies only to the ERC.
Let’s understand with an example:
Jay Turner has gross receipts including PPP loan forgiveness in the second quarter of 2021 was $275,000. His gross receipts for the corresponding quarter in 2019 was $220,000. The normal rules indicate she does not have a 20% reduction in gross receipts but there is an increase in Gross receipt with 28%. However, if Jay elects the safe-harbor, her gross receipts for this quarter are now $165,000, therefore, she has a reduction in gross receipts more than 20% and will qualify for the Employee Retention Credit in the second quarter as per the latest guidance issued on safe harbor to the employers by IRS and the Treasury. It is noteworthy that Jay will also automatically qualify for the third quarter aas he qualifies for the second quarter.
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Employers claim the ERC on their employment tax return in different ways, generally Form 941, Employers Quarterly Federal Tax Return PDF, or adjusted employment tax return, generally Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund PDF.
Revenue Procedure 2021-33, updates:
Notice 2021-20 PDF - addressed the ERC as it applies to qualified wages paid between March 12, 2020, and January 1, 2021.
Notice 2021-23 PDF - addressed the ERC as it applies to qualified wages paid between December 31, 2020 and July 1, 2021
Notice 2021-49 PDF - addressed the ERC as it applies to qualified wages paid between June 30, 2021 and before January 1, 2022