When it comes to determining eligibility for the Employee Retention Credit (ERC), a safe harbor is offered that allows all three loans to be excluded from gross income. The Internal Revenue Service (IRS) has stated that the ERC is not included in gross income for federal income tax purposes. However, the ERC does reduce the expenses that an eligible employer can deduct on their federal income tax return. For-profit taxpayers are subject to section 448 (c) while tax-exempt organizations are subject to section 6033. In the case of Sue, who has a living brother, Sam, who is not part of the business but is a constructive majority owner of the company, she cannot consider Jim's salary as qualifying salary for the ERC.
The credit is equivalent to 50 percent of qualifying wages (including qualifying health plan expenses) that an eligible employer pays in a calendar quarter. Employers can request the credit by submitting Form 941-X, which is the employer's adjusted quarterly federal tax return or request for reimbursement. Notably, Article 51 (i) of the Internal Revenue Code (IRC) does not directly prohibit claiming ERC for salaries paid to the majority owner of a corporation or to the spouse of the owner. Employers cannot deduct salaries used in calculating the ERC from taxable income up to the amount of the ERC.
The IRS has also confirmed that tips received by employees count as “qualified salaries” for employers to calculate credit amounts and that employers can request a tip credit from both the ERC and FICA for the same tips. When it was originally implemented, employers were not eligible for the ERC if they received a loan from the Check Protection Program (PPP). However, this has since changed and employers can now receive PPP loans and still be eligible for ERC. Grants or loan forgiveness from any other program will continue to count as gross income for the ERC. For tax-exempt employers, gross income includes gross income from all operations, not just from activities that constitute unrelated trades or businesses.
If an 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.