However, when evaluating gross income to qualify for the ERC, a Safe Harbor is offered that allows the three loans to be excluded. If the eligible employer is an entity other than a corporation, then a related person is any person who maintains a relationship described above with a person who owns, directly or indirectly, more than 50 percent of the entity's equity and profits. Before Safe Harbor, employers who received one or more of these benefits were required to include those amounts in their quarterly income when evaluating their eligibility based on proof of significant decline in gross income. Gross income does not include the repayment of a loan or the amounts received with respect to sales tax if the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits sales tax to the tax authority.
For the sole purpose of determining eligibility for the employee retention credit, a tax-exempt employer's gross income includes gross income from all operations, not just activities that constitute unrelated trades or businesses. Notably absent in Article 51 (i) of the IRC (or in the first IRC ERC guidelines) was the direct prohibition of claiming ERC for salaries paid to the majority owner of a corporation or to the spouse of the owner. The credit is equivalent to 50 percent of qualifying wages (including qualifying health plan expenses) that an eligible employer pays in a calendar quarter. All entities are considered a single employer for purposes of determining whether the employer had a significant decrease in its gross income if they are added as a controlled group of corporations under section 52 (a) of the Internal Revenue Code (the “Code”); are corporations, trusts, or sole proprietorships under common control under section 52 (b) of the Code; or are entities that are added under section 414 (m) or (o) of the Code; or are entities that are added under section 414 (m) or (o) of the Code.
Under the Safe Harbor, an employer can exclude from its gross income the amount of PPP loan forgiveness, SVOG and RRF grants when determining eligibility to apply for the ERC for a calendar quarter, if the employer consistently applies this safe haven in determining eligibility to apply for the ERC. To be an eligible employer based on a significant decrease in gross income, the employer must consider the gross income of all members of the aggregated group. However, the IRS further states that, without the safe haven, participation in these programs could prevent an employer from applying for the ERC for a calendar quarter in which there is a decrease in gross income, solely because their participation in the aid program resulted in a temporary increase in gross income. If the eligible employer is an estate or trust, then a related person includes the grantor, beneficiary or trustee of the estate or trust, or any person who maintains a relationship described above with a person who is the grantor, beneficiary, or trustee of the estate or trust.
While the amounts received from the other coronavirus relief programs listed above are already excluded from the employer's gross income, they should be included in their gross income unless the safe harbor is used, the IRS said. If the aggregated group does not experience a significant decrease in gross revenues, no member of the group may apply for the employee retention credit on that basis. An employer systematically applies this safe haven if (it excludes the amount of its gross income from each calendar quarter in which the gross income for that calendar quarter) is relevant to determining eligibility to apply for the ERC and (applies the safe harbor to all employers treated as a single employer under the ERC aggregation rules). While generous, the ERC is also complicated, which, in some cases, has prevented eligible employers from claiming it.
An employer that has a significant decrease in its gross income is an eligible employer that may be entitled to the employee retention credit. .
