A question that had bothered many employers that had borrowed money under the Paycheck Protection Program (PPP) was whether forgiveness of that loan, although excluded from taxable income, was nevertheless part of receipts under §448(c) that would impact the calculation of whether there had been a reduction in revenue that could qualify a taxpayer to claim the employee retention credit (ERC).

The IRS’s answer, in Revenue Procedure 2021-33,[1] is that, yes, it is included in gross receipts under IRC §448(c)—but if you want to exclude it consistently in your calculations of gross receipts under IRC §448(c) for ERC purposes only, the agency will accept that as well.

General Rule: §448(c) Gross Receipts Includes PPP Forgiveness and ERC-Coordinated Grants

The IRS Revenue Procedure contains a description of the law, including the exclusion of income for forgiveness of a PPP loan, as well as the exclusion from income of amounts received from a shuttered venue operator grant or a restaurant revitalization grant (the two referred to in this procedure as ERC-Coordinated Grants).[2] 

The procedure then goes on to give us the IRS’s view that these items would be gross receipts under IRC §448(c):

Although the amount of forgiveness of a PPP Loan is not included in gross income, that forgiveness amount would be included in gross receipts under § 448(c) of the Code and § 1.448-1T(f)(2)(iv), or § 6033 of the Code and § 1.6033- 2(g)(4), as applicable. Similarly, the amount of an ERC-Coordinated Grant received by a taxpayer is not included in gross income, but the amount would be included in gross receipts.[3]

Example – PPP Forgiveness Counts as Gross Receipts

TN, Inc. received a PPP loan of $200,000 in 2020.  TN, Inc. has determined that the loan forgiveness income was triggered for income tax purposes on June 15, 2021.  For the second quarter of 2021, TN, Inc. had gross receipts, other than receipts from forgiveness, of $750,000.  In the second quarter of 2019, TN, Inc. had gross receipts of $1,000,000.  With PPP forgiveness included in gross receipts for the second quarter of 2021, TN, Inc.’s gross receipts for that quarter under IRC §448(c) are $950,000, or 95% of the gross receipts for the same quarter in 2019.  Thus, the amount is not less than 80% of the same quarter in 2019.

Assuming TN, Inc. was not subject to a full or partial shutdown in the second quarter of 2021 and that there was not a 20% drop in gross receipts from the first quarter of 2021 as compared with the first quarter of 2019, the inclusion of the PPP forgiveness in gross receipts would deny TN, Inc. the ability to claim the ERC in the second quarter of 2021.  As well, it also could deny TN, Inc. any ERC in the third quarter of 2021, since TN, Inc. could not rely on a 20% drop in gross receipts in the immediately prior quarter to qualify for the ERC in the third quarter of 2021.

Safe Harbor to Exclude PPP Forgiveness and ERC-Coordinated Grants from §448(c) Gross Receipts for ERC Qualification

The IRS determined that the agency will provide a safe harbor method allowing the consistent exclusion of PPP forgiveness and ERC-Coordinated Grant income from gross receipts solely for ERC qualification purposes.  The agency explained its justification as follows:

Section 2301(g) of the CARES Act and § 3134(h) of the Code set forth a coordination rule providing that the employee retention credit does not apply to so much of the qualified wages paid by an eligible employer as are taken into account as payroll costs in connection with forgiveness of a PPP Loan or, in the case of § 3134(h), an ERC-Coordinated Grant (relief programs). This rule demonstrates a congressional intent that an employer be able to participate in the relief programs and also claim the employee retention credit, provided that the same dollar of wages that are paid for or reimbursed with relief program funds may not be treated as qualified wages for purposes of the employee retention credit. Including the amount of the forgiveness of a PPP Loan or the amount of an ERC-Coordinated Grant in gross receipts for determining eligibility to claim the employee retention credit could frustrate this congressional intent.[4]

The justification explains the problem that seems to frustrate Congressional intent:

Specifically, an employer that participated in one or more of the relief programs and that otherwise has the requisite percentage decline in gross receipts might be precluded from claiming an employee retention credit 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 within the meaning of the tax law.[5]

Thus, the Revenue Procedure provides:

Accordingly, this revenue procedure provides 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 employee retention credit (safe harbor). An employer is not required to apply this safe harbor. This safe harbor does not permit the exclusion of the amount of forgiveness of a PPP Loan or the amount of ERC-Coordinated Grants from the definition of gross receipts under § 448(c) or § 6033 of the Code for any other Federal tax purpose.[6]

The Revenue Procedure explains the application of the safe harbor as follows:

An employer may exclude the amount of the forgiveness of a PPP Loan and the amount of any ERC-Coordinated Grants from its gross receipts in determining eligibility to claim the employee retention credit for a calendar quarter if the employer consistently applies this safe harbor in determining eligibility to claim the employee retention credit. An employer consistently applies this safe harbor by (i) excluding the amount of the forgiveness of any PPP Loan and the amount of any ERC-Coordinated Grant from its gross receipts for each calendar quarter in which gross receipts for that calendar quarter are relevant to determining eligibility to claim the employee retention credit, and (ii) applying the safe harbor to all employers treated as a single employer under the employee retention credit aggregation rules.[7]

The election to exclude the PPP forgiveness from income is made by simply excluding the income consistently when determining eligibility for the employee retention credit:

An employer elects to use the safe harbor by 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 employee retention credit on its employment tax return or adjusted employment tax return for that calendar quarter or, for employers that file employment tax returns on an annual basis, for the year including the calendar quarter.[8]

Example – Election to Exclude PPP revenue from Gross Receipts

If TN, Inc. decides to elect the use of this Revenue Procedure, the company will now have gross receipts that are 75% of those in the same quarter in 2019 (750,000/1,000,000).  Thus, TN, Inc. will qualify to claim the ERC in the second quarter of 2021 based on this decline.

As well, TN, Inc. will also automatically qualify to claim the ERC in the third quarter of 2021, since now the immediately preceding quarter had a greater than 20% decline in gross receipts.

If a taxpayer wishes to revoke this election after making it, the IRS allows this to be done via an amended payroll tax report:

Subject to the rule in section 3.03 of this revenue procedure, an employer may revoke its safe harbor election by including the amount of the forgiveness of the PPP Loan or the amount of ERC-Coordinated Grants in its gross receipts when determining eligibility to claim the employee retention credit for a calendar quarter on its adjusted employment tax return for that calendar quarter or, for employers that file employment tax returns on an annual basis, for the year including the calendar quarter. Due to the consistency rule in section 3.03 of this revenue procedure, the employer must adjust all employment tax returns that are affected by the revocation of the safe harbor election.[9]

[1] Revenue Procedure 2021-33, August 10, 2021, https://www.irs.gov/pub/irs-drop/rp-21-33.pdf (retrieved August 10, 2021)

[2] Revenue Procedure 2021-33, Section 2

[3] Revenue Procedure 2021-33, Section 3.01

[4] Revenue Procedure 2021-33, Section 3.02

[5] Revenue Procedure 2021-33, Section 3.02

[6] Revenue Procedure 2021-33, Section 3.02

[7] Revenue Procedure 2021-33, Section 3.03

[8] Revenue Procedure 2021-33, Section 3.04

[9] Revenue Procedure 2021-33, Section 3.05