HIGHLIGHTS OF THIS ISSUE ADMINISTRATIVE, EMPLOYMENT TAX, EXEMPT ORGANIZATIONS EMPLOYMENT TAX INCOME TAX The IRS Mission Introduction Part III Notice 2021-49 Rev. Proc. 2021-31 Rev. Proc. 2021-33 Definition of Terms Abbreviations Numerical Finding List1 Numerical Finding List Finding List of Current Actions on Previously Published Items1 How to get the Internal Revenue Bulletin INTERNAL REVENUE BULLETIN We Welcome Comments About the Internal Revenue Bulletin Internal Revenue Bulletin: 2021-34 August 23, 2021 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. ADMINISTRATIVE, EMPLOYMENT TAX, EXEMPT ORGANIZATIONS Rev. Proc. 2021-33, page 327. This revenue procedure provides a safe harbor that permits a taxpayer to exclude certain items from “gross receipts” under §§ 448(c) and 6033 of the Internal Revenue Code (Code), as applicable, solely for purposes of determining eligibility to claim the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021 (CAA), and under section 3134 of the Code as enacted by section 9651 of the American Rescue Plan Act of 2021 (the ARP). The items covered by the safe harbor are: (1) the amount of the forgiveness of a Paycheck Protection Program loan under section 7(a)(37) or 7A of the Small Business Act, (2) a grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted as Title III of Division N of the CAA, and (3) a restaurant revitalization grant under section 5003 of the ARP. 26 CFR 601.105 Examination of returns and claims for refund, credit or abatement; determination of correct tax liability. Also Part I, § 3134; § 2301 of Public Law 116-136 EMPLOYMENT TAX Notice 2021-49, page 316. Notice 2021-49 provides guidance on the employee retention credit provided under section 3134 of the Internal Revenue Code (the Code), as added by section 9651 of the American Rescue Plan Act (ARP), applicable to qualified wages paid after June 30, 2021, and before January 1, 2022. Notice 2021-49 also provides guidance on several issues that arise under both section 2301 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and section 3134 of the Code. The miscellaneous issues addressed in this notice respond to various questions that the Treasury Department and the Internal Revenue Service have received about the employee retention credit applicable to both section 2301 of the CARES Act and section 3134 of the Code for qualified wages paid after March 12, 2020 and before January 1, 2022. Notice 2021-49 amplifies Notice 2021-20 and Notice 2021-23. INCOME TAX Rev. Proc. 2021-31, page 324. This revenue procedure provides: (1) two tables of limitations on depreciation deductions for owners of passenger automobiles placed in service by the taxpayer during calendar year 2021; and (2) a table of dollar amounts that must be used to determine income inclusions by lessees of passenger automobiles with a lease term beginning in calendar year 2021. The tables detailing these depreciation limitations and amounts used to determine lessee income inclusions reflect the automobile price inflation adjustments required by section 280F(d)(7). For purposes of this revenue procedure, the term “passenger automobiles” includes trucks and vans. 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also Part I, §§ 280F; 1.280F-7.) The IRS Mission Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly. It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. Part III Guidance on the Employee Retention Credit under Section 3134 of the Code and on Miscellaneous Issues Related to the Employee Retention Credit Notice 2021-49 I. PURPOSE This notice provides guidance on the employee retention credit available under section 3134 of the Internal Revenue Code (Code), enacted by section 9651 of the American Rescue Plan Act of 2021 (the ARP), Pub. L. No. 117-2, 135 Stat. 4 (March 11, 2021), which provides a credit for wages paid after June 30, 2021, and before January 1, 2022. This notice amplifies Notice 2021-20, 2021-11 IRB 922, which provides guidance on the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020), as amended by section 206 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (2020). This notice also amplifies Notice 2021-23, 2021-16 IRB 1113, which provides guidance on the employee retention credit under section 2301 of the CARES Act, as amended by section 207 of the Relief Act, for the first and second calendar quarters of 2021. Specifically, this notice amplifies both Notice 2021-20 and Notice 2021-23 by providing additional guidance on the employee retention credit, applicable to the third and fourth calendar quarters of 2021. As amplified by this notice, the rules set forth in Notice 2021-20 and Notice 2021-23 addressing CARES Act provisions that are the same as those provided under section 3134 of the Code continue to apply for the third and fourth calendar quarters of 2021. Finally, this notice provides additional guidance on issues regarding the employee retention credit under both section 2301 of the CARES Act and section 3134 of the Code. The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) will continue to monitor potential legislation related to the employee retention credit that may impact certain rules described in this notice. II. BACKGROUND ON SECTION 2301 OF THE CARES ACT AND SECTION 3134 OF THE CODE Section 2301 of the CARES Act, as originally enacted, provides for an employee retention credit for eligible employers, including tax-exempt organizations, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. Section 206 of the Relief Act adopted amendments and technical changes to section 2301 for qualified wages paid after March 12, 2020, and before January 1, 2021, primarily expanding eligibility for certain employers to claim the credit. Section 206 is effective retroactive to the effective date of section 2301. Section 207 of the Relief Act, which is effective for calendar quarters beginning after December 31, 2020, further amends section 2301 to extend the application of the employee retention credit to qualified wages paid after December 31, 2020, and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time. Section 9651 of the ARP enacted section 3134 of the Code, effective for calendar quarters beginning after June 30, 2021, to provide an employee retention credit for wages paid after June 30, 2021, and before January 1, 2022. On March 1, 2021, the Treasury Department and the IRS issued Notice 2021-20, providing guidance on the employee retention credit under section 2301 of the CARES Act, as amended by section 206 of the Relief Act. Notice 2021-20 continues to apply for calendar quarters in 2020. On April 2, 2021, the Treasury Department and the IRS issued Notice 2021-23, providing guidance on the employee retention credit under section 2301 of the CARES Act, as amended by section 207 of the Relief Act. Notice 2021-23 continues to apply for the first and second calendar quarters in 2021. Any reference to the “employee retention credit” in this notice generally refers to the employee retention credit under either section 2301 of the CARES Act or section 3134 of the Code, as applicable to the relevant calendar quarter. III. GUIDANCE ON CHANGES MADE BY SECTION 3134 OF THE CODE A. Extension of Employee Retention Credit Section III.A. of Notice 2021-23 describes the extension of the employee retention credit for qualified wages paid by an eligible employer after December 31, 2020, and before July 1, 2021. Section 3134(n) of the Code provides that section 3134 applies to wages paid after June 30, 2021, and before January 1, 2022. Accordingly, an eligible employer may also claim the employee retention credit for qualified wages paid in the third and fourth calendar quarters of 2021. B. Applicable Employment Taxes Under both section 2301(a) of the CARES Act and section 3134 of the Code, the employee retention credit is claimed against “applicable employment taxes.” For purposes of the employee retention credit under the CARES Act, section 2301(c)(1) defines “applicable employment taxes” to mean the taxes imposed on employers by section 3111(a) of the Code (employer’s share of the Old Age, Survivors, and Disability Insurance (social security tax)), or so much of the taxes imposed on employers by section 3221(a) of the Code (Tier 1 tax under the Railroad Retirement Tax Act (RRTA)) that are attributable to the rate in effect under section 3111(a). Section II.A. of Notice 2021-20 provides that, under section 2301, eligible employers are entitled to claim the employee retention credit against the employer’s share of social security tax after these taxes are reduced by any credits claimed under sections 3111(e) and (f), sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA), Pub. L. No. 116-127, 134 Stat. 178 (2020), and section 303(d) of the Relief Act. Section II.A. of Notice 2021-20 further provides that, under section 2301, eligible employers subject to the RRTA are entitled to claim the employee retention credit against the portion of Tier 1 tax under the RRTA that is equivalent to the employer’s share of social security tax after these taxes are reduced by any credits allowed under sections 7001 and 7003 of the FFCRA and section 303(d) of the Relief Act. For purposes of the employee retention credit under section 3134 of the Code, section 3134(c)(1) defines “applicable employment taxes” to mean the taxes imposed under section 3111(b) of the Code (employer’s share of Hospital Insurance (Medicare) tax), or so much of the portion of Tier 1 tax under the RRTA that is equivalent to the employer’s share of Medicare tax. Section 3134(b)(2) provides that the credit allowed under section 3134(a) with respect to a calendar quarter will not exceed the applicable employment taxes, reduced by any credits allowed under sections 3131 and 3132 of the Code (tax credits under the ARP for qualified sick leave wages and qualified family leave wages, respectively, paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021), on the wages paid with respect to the employment of all the employees of the eligible employer for such calendar quarter. Section 3134(b)(3) provides that if any amount of the credit under section 3134(a) exceeds the limitation under section 3134(b)(2) for any calendar quarter, such excess will be treated as an overpayment that will be refunded under sections 6402(a) and 6413(b) of the Code. Accordingly, for the third and fourth quarters of 2021, eligible employers are entitled to claim the employee retention credit against the employer’s share of Medicare tax, or the portion of Tier 1 tax under the RRTA that is equivalent to the employer’s share of Medicare tax, after these taxes are reduced by any credits allowed under sections 3131 and 3132 of the Code, with the excess refunded under section 6402 or 6413 of the Code. C. Maximum Amount of Employer’s Employee Retention Credit Section III.D. of Notice 2021-23 provides the rules related to the maximum amount of an eligible employer’s employee retention credit for the first and second calendar quarters in 2021. The employee retention credit equals 70 percent of qualified wages (including allocable qualified health plan expenses), and the amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to any employee is limited to $10,000 for any calendar quarter, for a maximum credit of $7,000 per employee for each of the first and second calendar quarter of 2021. Under section 3134(a) and (b)(1)(A) of the Code, these limits continue to apply in the third and fourth calendar quarters in 2021; however, a separate credit limit under section 3134(b)(1)(B) applies to “recovery startup businesses” as discussed in section III.D. of this notice. D. Recovery Startup Businesses Section 2301(c)(2) of the CARES Act, as amended by section 206 of the Relief Act, and sections III.A., III.D, and III.E. of Notice 2021-20 provide the rules for determining whether an employer is an eligible employer for purposes of the employee retention credit for 2020; section 2301(c)(2), as amended by section 207 of the Relief Act, and sections III.B. and III.C. of Notice 2021-23 provide those rules for the first and second calendar quarters of 2021. Applying the same rules as for the first two quarters of 2021, sections 3134(c)(2)(A)(ii)(I) and (II) of the Code provide that, for the third and fourth calendar quarters of 2021, an employer may be eligible for the employee retention credit with respect to a calendar quarter if (i) the operation of the employer’s trade or business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 19 (COVID-19), or (ii) the employer experiences a decline in gross receipts.1 Section 3134 adds a third category of employers that are eligible for the employee retention credit for the third and fourth calendar quarters of 2021. Specifically, section 3134(c)(2)(A)(ii)(III) provides that “recovery startup businesses” may be eligible employers for those calendar quarters. Section 3134(c)(5) of the Code defines a “recovery startup business” as an employer (i) that began carrying on any trade or business after February 15, 2020, (ii) for which the average annual gross receipts of the employer (as determined under rules similar to the rules under section 448(c)(3) of the Code) for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000, and (iii) that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. Section 3134(b)(1)(B) provides that in the case of an eligible employer that is a recovery startup business, the amount of the credit allowed under subsection 3134(a) (after application of the limit under subsection 3134(b)(1)(A)) for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000. Section III.A. of Notice 2021-20 provides that for purposes of the employee retention credit, “trade or business” has the same meaning as when used in section 162 of the Code other than the trade or business of performing services as an employee. Section 3134(c)(5)(A) of the Code provides that a recovery startup business is an employer that began carrying on a trade or business after February 15, 2020. Therefore, the determination of when an employer “began carrying on a trade or business” is made in the same manner as for purposes of section 162. In general, for purposes of section 162, a taxpayer has not begun carrying on a trade or business “until such time as the business has begun to function as a going concern and performed those activities for which it was organized.” Richmond Television Corp. v. U.S., 345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded on other grounds per curiam, 382 U.S. 68 (1965), on remand, 354 F.2d 410 (4th Cir. 1965), overruled on other grounds; NCNB Corporation v. United States, 684 F.2d 285 (4th Cir. 1982); see also Rev. Rul. 81-150, 1981-1 C.B. 119. Section 3134(c)(5) of the Code indicates that the average annual gross receipts of an employer is determined by applying rules similar to the rules in section 448(c)(3) of the Code and that the 3-taxable-year period ends with the taxable year preceding the calendar quarter for which the employer is claiming the employee retention credit. Section III.A. of Notice 2021-20 states that, for purposes of the employee retention credit, a tax-exempt organization described in section 501(c) of the Code that is exempt from tax under section 501(a) is deemed to be engaged in a “trade or business” with respect to all operations of the organization, as provided in section 2301(c)(2)(C) of the CARES Act. Similar to the rule in section 2301(c)(2)(C), section 3134(c)(2)(C)(i) provides that, in the case of an organization described in section 501(c) and exempt from tax under section 501(a), the requirement in section 3134(c)(2)(A)(i) of carrying on a trade or business to be an eligible employer and the requirement in section 3134(c)(2)(A)(ii)(I) that a trade or business has been fully or partially suspended due to an appropriate governmental order to be an eligible employer apply to all operations of the organization. Section 3134(c)(2)(C)(ii) further provides that, in the case of a tax-exempt organization, any reference to gross receipts will be treated as a reference to gross receipts within the meaning of section 6033 of the Code. While section 3134(c)(2)(C)(i) does not specifically reference the trade or business requirement in the definition of a recovery startup business in section 3134(c)(5)(A), because of the broad language in section 3134(c)(2)(C)(ii) for measuring gross receipts and the other language in section 3134(c)(2)(C)(i) indicating an intent by Congress to fully include tax-exempt organizations within the three categories of an eligible employer, the Treasury Department and the IRS have determined that it is appropriate for an organization described in section 501(c) and exempt from tax under section 501(a) to be able to be treated as an eligible employer due to being a recovery startup business based on all of its operations and average annual gross receipts determined under section 6033 as defined in section III.E. of Notice 2021-20. The Treasury Department and the IRS have also determined that it is appropriate for the term “qualified wages” to include wages paid by a recovery startup business. The definition of “qualified wages” in section 3134(c)(3)(A) of the Code is identical to the definition in section 2301(c)(3)(A) of the CARES Act. Section 3134(c)(3)(A)(i), the large eligible employer rule, defines qualified wages as wages paid with respect to which an employee is not providing services due to circumstances described in section 3134(c)(2)(A)(ii)(I) (relating to a full or partial suspension) or section 3134(c)(2)(A)(ii)(II) (relating to a decline in gross receipts). Section 3134(c)(3)(A)(ii), the small eligible employer rule, defines qualified wages as wages paid during any period described in section 3134(c)(2)(A)(ii)(I) (relating to a full or partial suspension) or paid with respect to any employee during a quarter described in section 3134(c)(2)(A)(ii)(II) (relating to a decline in gross receipts). Neither the large eligible employer rule in section 3134(c)(3)(A)(i) nor the small eligible employer rule in section 3134(c)(3)(A)(ii) was updated to include section 3134(c)(2)(A)(ii)(III) (relating to a recovery startup business). Thus, the language of the statute does not include a definition of qualified wages applicable to a recovery startup business. However, the inclusion of recovery startup businesses as a new category of eligible employer and the provision of a specific limitation on the amount of the employee retention credit to which recovery startup businesses are entitled indicates that Congress intended that this new category of eligible employer be able to claim the employee retention credit. In order to carry out this intent, the Treasury Department and the IRS have concluded that it is appropriate to read the small eligible employer rule in section 3134(c)(3)(A)(ii)(II) as if section 3134(c)(2)(A)(ii)(III) were included after the reference to section 3134(c)(2)(A)(ii)(II).2 Accordingly, in the third and fourth calendar quarters of 2021, a recovery startup business that is a small eligible employer within the meaning of section 3134(c)(3)(A)(ii) may treat all wages paid with respect to an employee during the quarter as qualified wages. The determination of whether an employer is a recovery startup business is made separately for each calendar quarter. For example, if an eligible employer is a recovery startup business in the third quarter of 2021 but is not a recovery startup business in the fourth quarter of 2021 because it is an eligible employer due to a full or partial suspension or a decline in gross receipts during the fourth quarter of 2021, the $50,000 limitation applies to the third quarter of 2021 but does not apply to the fourth quarter of 2021. The aggregation rules described in section III.B. of Notice 2021-20 apply when determining whether an employer’s trade or business is fully or partially suspended or the employer experiences a decline in gross receipts. Similarly, the aggregation rules described in section III.B. of Notice 2021-20 apply when determining if an employer is a recovery startup business. The aggregation rules also apply with respect to the $50,000 limitation on the credit. E. Qualified Wages Section III.G. of Notice 2021-20 and section III.E. of Notice 2021-23 set forth the rules for determining qualified wages paid after March 12, 2020, and before January 1, 2021, and qualified wages paid after December 31, 2021, and before July 1, 2021, respectively. Section 3134 of the Code generally includes the same rules for determining qualified wages as the rules for wages paid in the first and second calendar quarters of 2021, with a few exceptions, discussed below. Section 3134(c)(3)(A) of the Code defines the term “qualified wages” and provides the distinction in treatment between large eligible employers and small eligible employers. Section 3134(c)(3)(B) provides that in the case of any employer that was not in existence in 2019, section 3134(c)(3)(A) is applied by substituting “2020” for “2019” each place it appears and requires eligible employers not in existence in 2019 to determine the average number of full-time employees in 2020 instead of 2019. Section III.G. of Notice 2021-20 provides rules for determining the average number of full-time employees, including for employers that came into existence in 2020. Accordingly, the rules set forth in section III.G. of Notice 2021-20 for determining the average number of full-time employees continue to apply in the third and fourth calendar quarters of 2021.3 Section 3134(c)(3)(C) of the Code provides a different rule for qualified wages paid by “severely financially distressed employers.” Section 3134(c)(3)(C)(ii) defines a “severely financially distressed employer” as an employer that is an eligible employer based on a decline in gross receipts, but the gross receipts for the eligible employer for the calendar quarter are less than 10 percent of the gross receipts as compared to the same calendar quarter in calendar year 2019, instead of less than 80 percent. Accordingly, for purposes of the employee retention credit for the third and fourth calendar quarters of 2021, an eligible employer with gross receipts that are less than 10 percent of the gross receipts for the same calendar quarter in calendar year 2019 (or 2020, if the employer was not in existence in 2019) is a severely financially distressed employer. The rules for how an employer determines whether it has experienced a decline in gross receipts for purposes of the employee retention credit are set forth in section III.C. of Notice 2021-23. Whether an employer has met the decline in gross receipts test generally is determined by comparing the quarter in 2020 or 2021 to the same quarter in 2019. Notice 2021-23 also provides rules that address the circumstance in which the employer was not in existence as of the beginning of a calendar quarter in 2019 and rules for how an employer may elect to use an alternative quarter to determine whether it has experienced a decline in gross receipts. These rules that apply for purposes of determining whether an employer is an eligible employer based on a decline in gross receipts also apply, in the third and fourth calendar quarters of 2021, for purposes of determining whether an eligible employer is a severely financially distressed employer based on the 10 percent threshold.4 For example, an eligible employer that has gross receipts of 5 percent in the second quarter of 2021 compared to gross receipts in the second quarter of 2019 is a severely financially distressed employer for the third quarter of 2021 based on the alternative quarter election. If an employer is a severely financially distressed employer, section 3134(c)(3)(C)(i) of the Code provides that, notwithstanding section 3134(c)(3)(A)(i) (which limits qualified wages for large eligible employers to wages paid to an employee for time the employee is not providing services due to a full or partial suspension or a decline in gross receipts), the term “qualified wages” means wages paid by such employer with respect to an employee during any calendar quarter.5 Accordingly, for the third and fourth calendar quarters of 2021, a severely financially distressed employer that is a large eligible employer may treat all wages paid to its employees during the quarter in which the employer is considered severely financially distressed as qualified wages. Example: Employer A is a large eligible employer with gross receipts in the third quarter of 2021 equal to 15 percent of its gross receipts in the third quarter of 2019. Employer A is not a severely financially distressed employer for the third quarter of 2021 based on the third quarter’s gross receipts. However, Employer A’s gross receipts in the second quarter of 2021 are less than 10 percent of its gross receipts in the second quarter of 2019; therefore, Employer A may elect to use the alternative election rule to meet the definition of a severely financially distressed employer under section 3134(c)(3)(C)(ii) of the Code in the third quarter of 2021. In the third quarter of 2021, Employer A pays Employee B $10,000 in wages for services Employee B provided during the third quarter. Employer A may claim the employee retention credit in the third quarter of 2021 (the quarter in which Employer A is determined to be severely financially distressed under the alternative election rule) and may treat all of the wages paid to Employee B during the third quarter of 2021 as qualified wages. In the fourth quarter of 2021, Employer A’s gross receipts equal 20 percent of its gross receipts in the fourth quarter of 2019. Employer A is not a severely financially distressed employer for the fourth quarter of 2021 based on the fourth quarter’s gross receipts. In addition, Employer A cannot use the alternative election rule in the fourth quarter of 2021 to qualify as a severely distressed employer because Employer A’s gross receipts in the third quarter of 2021 are not less than 10 percent of its gross receipts in 2019; therefore, Employer A is not a severely financially distressed employer (though it is still an eligible employer) in the fourth quarter of 2021. Employer A pays Employee B $10,000 in wages in the fourth quarter of 2021 for services Employee B provided during the fourth quarter of 2021. Employer A may not treat any of the wages paid to Employee B for services provided during the fourth quarter as qualified wages because Employer A is a large eligible employer and does not meet the definition of a severely financially distressed employer for the fourth quarter of 2021. Section 3134(c)(3)(D) of the Code provides that for the third and fourth calendar quarters of 2021, the term “qualified wages” does not include any wages taken into account under sections 41, 45A, 45P, 45S, 51, 1396, 3131, and 3132 of the Code. That is, if wages are taken into account for purposes of those sections, those wages cannot be taken into account for purposes of the employee retention credit.6 F. Coordination with Certain Programs Section 3134(h)(1) of the Code provides that section 3134 does not apply to qualified wages paid by an eligible employer if the qualified wages are taken into account as payroll costs in connection with certain programs. Section 3134(h)(1)(A) provides that section 3134 does not apply to so much of the qualified wages as are taken into account as payroll costs in connection with a covered loan under section 7(a)(37) or 7A of the Small Business Act (a first or second draw PPP loan). Section 3134(h)(1)(B) provides that section 3134 does not apply to so much of the qualified wages as are taken into account as payroll costs in connection with a grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act (shuttered venue operators grant), enacted as Title III of Division N of the Consolidated Appropriations Act, 2021. Section 3134(h)(1)(C) provides that section 3134 does not apply to so much of the qualified wages as are taken into account as payroll costs in connection with a restaurant revitalization grant under section 5003 of the ARP (restaurant revitalization grant). Section 3134(h)(2) of the Code states that the Secretary will issue guidance providing that payroll costs paid during the covered period will not fail to be treated as qualified wages under section 3134 to the extent that a first or second draw PPP loan is not forgiven by reason of a decision under section 7(a)(37)(J) or section 7A(g) of the Small Business Act. Section III.I. of Notice 2021-20 provides rules related to the interaction between PPP loans and the employee retention credit; under those rules, the employee retention credit does not apply to the qualified wages for which an election or deemed election to not take the wages into account for purposes of the credit is made. These rules are derived from section 2301(g)(1) and (g)(2) of the CARES Act, as amended by the Relief Act. Section 3134(g) of the Code retains the same language as section 2301(g)(1) of the CARES Act and section 3134(h)(1) and (h)(2) is similar in operation to section 2301(g)(1) and (g)(2); accordingly, the rules related to the interaction between PPP loans and the employee retention credit under section III.I. of Notice 2021-20 continue to apply in the third and fourth calendar quarters of 2021. Thus, the determination of whether section 3134 applies to amounts of qualified wages taken into account as payroll costs for PPP loans for purposes of section 3134(h)(1)(A) and (h)(2) are made in the same manner and under the same principles as prescribed in section III.I. of Notice 2021-20. The shuttered venue operators grant was established by section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act and amended by the ARP. The restaurant revitalization grant was established by the ARP. Coordination between the employee retention credit and these grants is not required under section 2301 of the CARES Act, which governs the employee retention credit for 2020 and the first two quarters of 2021. However, pursuant to section 3134(h)(1)(B) and (C) of the Code, an eligible employer receiving a shuttered venue operators grant or restaurant revitalization grant may not treat any amounts reported to the Small Business Administration (SBA) or otherwise taken into account as payroll costs in connection with either program as qualified wages for purposes of the employee retention credit in the third and fourth quarters of 2021. An eligible employer receiving a shuttered venue operators grant or restaurant revitalization grant must retain in its records support for the employee retention credit claimed, which includes any documentation supporting that the eligible employer did not claim the employee retention credit on amounts taken into account as payroll costs paid in the third and fourth quarters of 2021 in connection with the shuttered venue operators grant or restaurant revitalization grant programs. G. Claiming the Credit Section III.J. of Notice 2021-20 and section III.F. of Notice 2021-23 set forth the rules for claiming the employee retention credit in 2020 and the first and second calendar quarters in 2021, respectively. The rules as set forth in Notice 2021-20 and Notice 2021-23, including the rules pertaining to claiming an advance and relevant limitations, continue to apply for the third and fourth quarters in 2021. Section 3134(j)(3)(B) of the Code provides for the reconciliation of the employee retention credit with advance payments of the credit. If an employer receives excess advance payments of the credit, then the tax imposed under section 3111(b) of the Code or so much of the tax imposed under section 3221(a) of the Code as is attributable to the rate in effect under section 3111(b), as applicable, for the calendar quarter is increased by the amount of the excess. Section 2301 of the CARES Act, as amended by section 207 of the Relief Act, also provides for the reconciliation of the credit with advance payments, but the reconciliation under section 3134(j)(3)(B) is modified due to the change in the definition of applicable employment taxes as discussed in section III.B of this notice and to specifically provide that excess advances for employers described in section 3134(j)(2) are treated as an additional tax.7 Section 3134(l) of the Code extends the limitation on assessment. Section 3134(l) provides that, notwithstanding section 6501 of the Code, the limitation on the time period for the assessment of any amount attributable to a credit claimed under section 3134 will not expire before the date that is 5 years after the later of (i) the date on which the original return that includes the calendar quarter with respect to which the credit is determined is filed, or (ii) the date on which the return is treated as filed under section 6501(b)(2). The extension of limitation on assessment applies to the employee retention credit claimed for the third and fourth calendar quarters of 2021 under section 3134 but does not apply to the employee retention credit under section 2301 of the CARES Act. IV. GUIDANCE ON MISCELLANEOUS ISSUES APPLICABLE TO THE EMPLOYEE RETENTION CREDIT FOR BOTH 2020 AND 2021 This section IV addresses several issues related to the employee retention credit available during both 2020 and 2021. Unless otherwise provided below in this section, the provisions of this section IV apply to, and are intended to clarify the application of, the employee retention credit under both section 2301 of the CARES Act, as amended by the Relief Act, and section 3134 of the Code for calendar quarters in 2020 and 2021. To the extent that an employer files an adjusted or amended return to reflect these clarifications and consequently owes additional tax, any penalties for failure to timely pay or deposit tax will not apply if the taxpayer can show reasonable cause and not willful neglect for those failures. A. Full-time Employees and Full-time Equivalents The Treasury Department and the IRS have been asked about the definition of “full-time employee” 8 for the purpose of the employee retention credit, including (i) whether “full-time equivalents” (within the meaning of section 4980H(c)(2)(E) of the Code) are required to be included in the determination of whether an eligible employer is a large eligible employer or small eligible employer and (ii) whether wages paid to employees who are not full-time employees may be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied. For purposes of determining whether an eligible employer is a large eligible employer or a small eligible employer, eligible employers are not required to include full-time equivalents when determining the average number of full-time employees. However, for purposes of identifying qualified wages, an employee’s status as a full-time employee is irrelevant and wages paid to an employee who is not full-time may be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied. B. Treatment of Tips and the Section 45B Credit The Treasury Department and the IRS have been asked whether tips are qualified wages. In general, qualified wages are limited to wages as defined in section 3121(a) of the Code and compensation as defined in section 3231(e) of the Code, with certain modifications relating to the inclusion of qualified health plan expenses and, for calendar quarters in 2021, remuneration paid for services to certain governmental employers. In addition, under section 2301(c)(6) of the CARES Act and section 3134(c)(6) of the Code, any term used in section 2301 or section 3134, respectively, has the same meaning as when used in chapter 21 or chapter 22 of the Code. Section 3121(a)(12) of the Code excludes from the definition of “wages” tips paid in any medium other than cash and cash tips received by an employee in any calendar month in the course of employment by an employer unless the amount of the cash tips is $20 or more. Accordingly, if cash tips received by an employee in a calendar month amount to $20 or more, all of the cash tips received by the employee in that calendar month are included in wages. Similarly, section 3231(e)(3) of the Code provides that the term “compensation” includes cash tips received by an employee in any calendar month in the course of employment by an employer unless the amount of such cash tips is less than $20. Under section 3121(q), tips received by an employee in the course of the employee’s employment are considered remuneration for that employment (i.e., wages) and are deemed to have been paid by the employer for purposes of the taxes imposed by section 3111(a) and (b) of the Code. Thus, for purposes of chapters 21 and 22 of the Code, cash tips of $20 or more in a month are treated as wages paid by the employer. Therefore, any cash tips treated as wages within the definition of section 3121(a) of the Code or compensation within the definition of section 3231(e)(3) of the Code are treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied. The Treasury Department and the IRS have also been asked whether an eligible employer may claim both the employee retention credit and the credit available under section 45B of the Code on the same wages. Section 45B(a) provides that, for purposes of the general business credit under section 38 of the Code, the credit for employer social security and Medicare taxes paid on certain employee tips is an amount equal to the “excess employer social security tax” paid or incurred by the employer. The term “excess employer social security tax” means any tax paid by an employer under section 3111 of the Code (both social security tax and Medicare tax) on its employees’ tip income without regard to whether the employees reported the tips to the employer pursuant to section 6053(a) of the Code. Consequently, the section 45B credit is available with respect to unreported tips in an amount equal to the “excess employer social security tax” paid or incurred by the employer. No credit, however, is allowed to the extent tips are used to meet the federal minimum wage rate. For purposes of this limitation, the federal minimum wage rate is the rate that was in effect on January 1, 2007. The credit is available with respect to Federal Insurance Contributions Act (FICA) taxes paid on tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption, if it is customary for customers to tip the employees. Section 2301 of the CARES Act and section 3134 of the Code cross-reference specific provisions in the Code, the CARES Act, the FFCRA, the Consolidated Appropriations Act, 2021, and the ARP that prevent the receipt of a double benefit with respect to wages for which the employee retention credit is claimed. Neither section 2301 nor section 3134 cross-references section 45B of the Code. Section 45B(c) denies a deduction under chapter 1 of the Code for any amount taken into account in determining the credit under section 45B; however, this provision does not prevent the receipt of both the employee retention credit and the section 45B credit for the same wages. Therefore, eligible employers are not prevented from receiving both the employee retention credit and the section 45B credit for the same wages. C. Timing of Qualified Wages Deduction Disallowance Section 2301(e) of the CARES Act, as explained in section III.L. of Notice 2021-20, and section 3134(e) of the Code provide the general rule that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit. The Treasury Department and the IRS have been asked about the timing of the reduction, specifically in the circumstance in which a taxpayer files an adjusted employment tax return to claim the employee retention credit for prior calendar quarters and has already filed a federal income tax return for the tax year in which the credit is claimed on the adjusted return. Under section III.L. of Notice 2021-20, a reduction in the amount of the deduction allowed for qualified wages, including qualified health plan expenses, caused by receipt of the employee retention credit occurs for the tax year in which the qualified wages were paid or incurred. When a taxpayer claims the employee retention credit because of the retroactive amendment of section 2301 of the CARES Act by section 206(c) of the Relief Act (relating to eligibility of PPP borrowers to claim the employee retention credit) or otherwise files an adjusted employment tax return to claim the employee retention credit, the taxpayer should file an amended federal income tax return or administrative adjustment request (AAR), if applicable, for the taxable year in which the qualified wages were paid or incurred to correct any overstated deduction taken with respect to those same wages on the original federal tax return. Section 2301(e) generally provides, in relevant part, that rules similar to the rules of section 280C(a) of the Code shall apply. Section 280C(a) requires tracing to the specific wages generating the applicable credit. See, generally, Treas. Reg. § 1.280C-1. To satisfy this tracing requirement, the taxpayer must file an amended return or AAR, as applicable. D. Related Individuals The Treasury Department and the IRS have been asked whether wages paid to an employee who owns more than 50 percent (majority owner) of the value of a corporation may be treated as qualified wages, as well as whether wages paid to a spouse of a majority owner may be treated as qualified wages. Section 2301(e) of the CARES Act and section 3134(e) of the Code provide, in relevant part, that rules similar to the rules of section 51(i)(1) of the Code apply. Section 51(i)(1) generally provides that wages paid to certain related individuals are not taken into account for purposes of the work opportunity credit. Specifically, section 51(i)(1) and Treas. Reg. § 1.51-1(e)(1) provide that wages are not taken into account with respect to an individual who bears any of the relationships described in section 152(d)(2)(A)-(H) of the Code to the following: (i) the taxpayer, or (ii) if the taxpayer is a corporation, to an individual who owns, directly or indirectly more than 50 percent in value of the outstanding stock of the corporation (majority owner of a corporation), or (iii) if the taxpayer is an entity other than a corporation, to any individual who owns, directly or indirectly, more than 50 percent of the capital and profits interests in the entity (majority owner of a noncorporate entity). Section 51(i)(1)(A) includes a parenthetical at the end of the subparagraph stating that an individual’s ownership is determined with the application of section 267(c) of the Code. The Treasury Department and the IRS have concluded that the section 267(c) ownership attribution rules apply for purposes of determining both an individual’s ownership of stock of a corporation and an individual’s capital and profits interests in a partnership or other entity, consistent with the language in Treas. Reg. § 1.51-1(e)(1)(iii) and section 51(i)(1)(A). Initially, simply applying the rules of section 152(d)(2)(A)-(H) of the Code for purposes of the employee retention credit, before taking into consideration the attribution rules of section 267(c), the wages paid to employees with the following relationships to a majority owner of a corporation or of a partnership or other entity are not qualified wages: (A) A child or a descendant of a child. (B) A brother, sister, stepbrother, or stepsister. (C) The father or mother, or an ancestor of either. (D) A stepfather or stepmother. (E) A niece or nephew. (F) An aunt or uncle. (G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. (H) An individual (other than a spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household. Section 267(c) of the Code provides rules regarding the constructive ownership of stock for purposes of determining whether an individual is considered a majority owner of a corporation.9 Section 267(c) sets forth the following rules to determine whether an individual has constructive ownership of stock of a corporation: (1) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered as being owned proportionately by or for its shareholders, partners, or beneficiaries; (2) an individual is considered to own the stock owned, directly or indirectly, by or for the individual’s family; (3) an individual owning (otherwise than by the application of (2)) any stock in a corporation is considered to own the stock owned, directly or indirectly, by or for his partner; (4) the family of an individual includes only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; and (5) stock constructively owned by a person by reason of the application of (1) will be treated, for the purpose of applying (1), (2), or (3), as actually owned by that person. Stock constructively owned by an individual by reason of the application of (2) or (3) will not be treated as owned by the individual to again apply either rule to reattribute and make another individual the constructive owner of the stock. Applying the rules of sections 152(d)(2)(A)-(H) and 267(c) of the Code, a majority owner of a corporation is a related individual for purposes of the employee retention credit, whose wages are not qualified wages, if the majority owner has a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant. That is, applying the constructive ownership rules of section 267(c), the direct majority owner’s ownership of the corporation is attributed to each of the owner’s family members with a relationship described in section 267(c)(4); further, because each of those family members is considered to own more than 50 percent of the stock of the corporation after applying section 267(c), the direct majority owner of the corporation would have a relationship as defined in section 152(d)(2)(A)-(H) to the family member who is a constructive majority owner. Therefore, the direct majority owner is a related individual for purposes of the employee retention credit.10 The spouse of a majority owner is a related individual for purposes of the employee retention credit, whose wages are not qualified wages, if the majority owner has a family member who is a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant (and thus is deemed to own the majority owner’s shares under section 267(c) of the Code) and the spouse bears a relationship described in section 152(d)(2)(A)-(H) of the Code to the family member. For example, a direct majority owner’s brother would be a constructive majority owner under section 267(c)(2) and (4) and the spouse of the direct majority owner would be considered a related individual to the constructive majority owner by virtue of the in-law relationship described in section 152(d)(2)(G). In the event that the majority owner of a corporation has no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant as defined in section 267(c)(4) of the Code, then neither the majority owner nor the spouse is a related individual within the meaning of section 51(i)(1) of the Code and the wages paid to the majority owner and/or the spouse are qualified wages for purposes of the employee retention credit, assuming the other requirements for qualified wages are satisfied. The following examples illustrate the application of these rules: Example 1: Corporation A is owned 80 percent by Individual E and 20 percent by Individual F. Individual F is the child of Individual E. Corporation A is an eligible employer with respect to the first calendar quarter of 2021. Both Individual E and Individual F are employees of Corporation A. Pursuant to the attribution rules of section 267(c) of the Code, both Individual E and Individual F are treated as 100 percent owners of Corporation A. Individual E has the relationship to Individual F described in section 152(d)(2)(C) of the Code, and Individual F has the relationship to Individual E described in section 152(d)(2)(A). Accordingly, Corporation A may not treat as qualified wages any wages paid to either Individual E or Individual F because both Individual E and Individual F are each related individuals for purposes of the employee retention credit. Example 2: Corporation B is owned 100 percent by Individual G. Individual H is the child of Individual G. Corporation B is an eligible employer with respect to the first calendar quarter of 2021. Individual G is an employee of Corporation B, but Individual H is not. Pursuant to the attribution rules of section 267(c) of the Code, Individual H is attributed 100 percent ownership of Corporation B, and both Individual G and Individual H are treated as 100 percent owners. Individual G has the relationship to Individual H described in section 152(d)(2)(C) of the Code. Accordingly, Corporation B may not treat as qualified wages any wages paid to Individual G because Individual G is a related individual for purposes of the employee retention credit. Example 3: Corporation C is owned 100 percent by Individual J. Corporation C is an eligible employer with respect to the first calendar quarter of 2021. Individual J is married to Individual K, and they have no other family members as defined in section 267(c)(4) of the Code. Individual J and Individual K are both employees of Corporation C. Pursuant to the attribution rules of section 267(c), Individual K is attributed 100 percent ownership of Corporation C, and both Individual J and Individual K are treated as 100 percent owners. However, Individuals J and K do not have any of the relationships to each other described in section 152(d)(2)(A)-(H) of the Code. Accordingly, wages paid by Corporation C to Individual J and Individual K in the first calendar quarter of 2021 may be treated as qualified wages if the amounts satisfy the other requirements to be treated as qualified wages. Example 4: Corporation D is owned 34 percent by Individual L, 33 percent by Individual M, and 33 percent by Individual N. Individual L, Individual M, and Individual N are siblings. Corporation D is an eligible employer with respect to the first calendar quarter of 2021. Individual L, Individual M, and Individual N are employees of Corporation D. Pursuant to the attribution rules of section 267(c) of the Code, Individual L, Individual M, and Individual N are treated as 100 percent owners. Individual L, Individual M, and Individual N have the relationship to each other described in section 152(d)(2)(B) of the Code. Accordingly, Corporation D may not treat as qualified wages any wages paid to Individual L, Individual M, or Individual N. E. Alternative Quarter Election for Calendar Quarters in 2021 Section III.C. of Notice 2021-23 provides rules for determining whether an employer had a decline in gross receipts for purposes of the employee retention credit for the first and second calendar quarters of 2021. Section 3134 of the Code extends the same rules to the third and fourth calendar quarters of 2021; thus, the rules provided in section III.C. of Notice 2021-23 continue to apply for these quarters. Section III.C. of Notice 2021-23 also provides rules for using the alternative quarter election when determining whether there has been a decline in gross receipts for purposes of the employee retention credit for a calendar quarter in 2021. The Treasury Department and the IRS have been asked whether an eligible employer must consistently use the alternative quarter election once it has made the election. As noted in section III.C. of Notice 2021-23, the determination of whether an employer is an eligible employer based on a decline in gross receipts is made separately for each calendar quarter. Thus, employers are not required to use the alternative quarter election consistently. For example, an employer may be an eligible employer due to a decline in gross receipts for the second quarter of 2021 if its gross receipts for the second quarter are equal to 75 percent of its gross receipts in the second quarter of 2019 (i.e., the employer does not rely on the alternative quarter election for the second quarter); the employer could then use the alternative quarter election to be an eligible employer for the third quarter of 2021. F. Gross Receipts Safe Harbor in Notice 2021-20 Section III.E. of Notice 2021-20 permits an employer that acquires a business in 2020 to include the gross receipts of the acquired business in its gross receipts for 2019 to determine whether the employer experienced a significant decline in gross receipts. The safe harbor allows the employer to include the gross receipts of the acquired business regardless of the fact that the employer did not own the acquired business during a calendar quarter in 2019. The Treasury Department and the IRS have been asked whether this rule continues to apply to employers that acquire businesses in 2021. This rule continues to apply to employers that acquire businesses in 2021 for purposes of measuring whether a decline in gross receipts occurred. The Treasury Department and the IRS have also been asked how to calculate gross receipts of employers that came into existence in the middle of a calendar quarter in 2020. Section III.E. of Notice 2021-20 provides rules for determining gross receipts for an employer that came into existence in 2019. The same rule set forth in section III.E. of Notice 2021-20 continues to apply for 2021. For example, an employer that came into existence in the third quarter of 2020 should use that quarter as the base period to determine whether it experienced a significant decline in gross receipts for the first three quarters in 2021 and should use the fourth quarter of 2020 for comparison to the fourth quarter of 2021 to determine whether it experienced a significant decline in gross receipts. V. EFFECT ON OTHER DOCUMENTS Notice 2021-20 and Notice 2021-23 are amplified and clarified as provided in this notice. VI. PAPERWORK REDUCTION ACT Any collection of information associated with this notice has been submitted to the Office of Management and Budget for review under OMB control number 1545-0029 in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a valid OMB control number. VII. DRAFTING INFORMATION The principal authors of this notice are Dixie Pond and Danchai Mekadenaumporn, of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), although other Treasury Department and IRS officials participated in its development. For further information on the provisions of this notice, please contact Ms. Pond or Mr. Mekadenaumporn at 202-317-6798 (not a toll-free number). 1 The rules for determining a significant decline or decline in gross receipts are set forth in section III.E. of Notice 2021-20 and section III.C. of Notice 2021-23, respectively. As with the first and second calendar quarters of 2021, the determination of whether an employer is an eligible employer due to a decline in gross receipts is made separately for each of the third and fourth calendar quarters of 2021 and is based on an 80 percent threshold as set forth in section III.C. of Notice 2021-23. 2 Based on the definition of a recovery startup business as requiring average annual gross receipts for the prior 3 taxable years of not more than $1,000,000, the Treasury Department and the IRS do not anticipate that any recovery startup business would be a large eligible employer within the meaning of section 3134(c)(2)(A)(i). 3 Questions have arisen about whether full-time equivalents are included in determining the average number of full-time employees. See section IV.A. of this notice for a clarification. 4 These rules apply for determining whether an eligible employer that has already met the decline in gross receipts test will be treated as a severely financially distressed employer with respect to qualified wages; a severely financially distressed employer is not a separate category of eligible employer. An employer should first determine whether it satisfies the definition of eligible employer before determining whether it is considered a severely financially distressed employer. 5 The language of section 3134(c)(3)(C)(i) of the Code is ambiguous as to the calendar quarter in which wages paid by a severely financially distressed employer may be treated as qualified wages. Due to the reference to section 3134(c)(3)(A)(i) of the Code, however, the Treasury Department and the IRS have determined that Congress intended section 3134(c)(3)(C)(i) to extend the small eligible employer rule to a severely financially distressed employer that is also a large eligible employer, and not to change the timing of when qualified wages are paid for purposes of claiming the employee retention credit. Therefore, a severely financially distressed employer may claim the employee retention credit only with respect to qualified wages the employer paid in the same calendar quarter in which it is claiming the credit. 6 These Code sections, with the exception of sections 3131 and 3132, were included in the denial of double benefit provisions for the first and second calendar quarters of 2021 and applied in the inverse order, meaning that any wages taken into account as qualified wages for the employee retention credit could not be taken into account for those sections. See section III.E. of Notice 2021-23. 7 On July 29, 2020, the Treasury Department and the IRS issued temporary regulations (T.D. 9904) amending the employment tax regulations under sections 3111 and 3221 of the Code to provide for the recapture of erroneous refunds of the credits under section 2301 of the CARES Act pursuant to the authority granted under section 2301 of the CARES Act (81 FR 45514). A notice of proposed rulemaking cross-referencing the temporary regulations was published in the Federal Register on the same day as the temporary regulations (85 FR 45551). 8 The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code. See Q/A-31 of Notice 2021-20 and section III.E. of Notice 2021-23. 9 This discussion is limited to a majority owner of a corporation because the owner of a partnership, or other noncorporate entity, generally cannot be an employee of that entity, and therefore cannot be paid wages within the meaning of section 3121(a) of the Code. A partner or other self-employed individual is not eligible for the employee retention credit on the individual’s earned income. 10 Depending on the facts, the application of the rules of sections 152(d)(2)(A)-(H) and 267(c) may also result in a minority owner of a corporation being a related individual for purposes of the employee retention credit. See, example 4. Rev. Proc. 2021-31 SECTION 1. PURPOSE This revenue procedure provides: (1) two tables of limitations on depreciation deductions for owners of passenger automobiles placed in service by the taxpayer during calendar year 2021; and (2) a table of dollar amounts that must be used to determine income inclusions by lessees of passenger automobiles with a lease term beginning in calendar year 2021. These tables reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. For purposes of this revenue procedure, the term “passenger automobiles” includes trucks and vans. SECTION 2. BACKGROUND .01 For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. For passenger automobiles placed in service after 2018, § 280F(d)(7) requires the Internal Revenue Service to increase the amounts allowable as depreciation deductions by a price inflation adjustment amount that is determined using the automobile component of the Chained Consumer Price Index for all Urban Consumers published by the Department of Labor (“C-CPI-U”). .02 Section 168(k)(1) provides that, in the case of qualified property, the depreciation deduction allowed under § 167(a) for the taxable year in which the property is placed in service includes an allowance equal to the applicable percentage of the property’s adjusted basis (hereinafter, referred to as “§ 168(k) additional first year depreciation deduction”). Pursuant to § 168(k)(6)(A), the applicable percentage is 100 percent for qualified property acquired and placed in service after September 27, 2017, and placed in service before January 1, 2023, and is phased down 20 percent each year for property placed in service through December 31, 2026. Pursuant to § 168(k)(8)(D)(i), no § 168(k) additional first year depreciation deduction is allowed or allowable for qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer after 2019. For qualified property acquired and placed in service after September 27, 2017, § 168(k)(2)(F)(i) increases the first-year depreciation allowed under § 280F(a)(1)(A)(i) by $8,000. .03 Tables 1 and 2 of this revenue procedure provide depreciation limitations for passenger automobiles placed in service by the taxpayer during calendar year 2021. Table 1 provides depreciation limitations for passenger automobiles acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2021, for which the § 168(k) additional first year depreciation deduction applies. Table 2 provides depreciation limitations for passenger automobiles placed in service by the taxpayer during calendar year 2021 for which no § 168(k) additional first year depreciation deduction applies. The § 168(k) additional first year depreciation deduction does not apply for 2021 if the taxpayer: (1) did not use the passenger automobile during 2021 more than 50 percent for business purposes; (2) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(7) for the class of property that includes passenger automobiles; (3) acquired the passenger automobile used and the acquisition of such property did not meet the acquisition requirements in § 168(k)(2)(E)(ii) and § 1.168(k)-2(b)(3)(iii) of the Income Tax Regulations; or (4) acquired the passenger automobile before September 28, 2017, and placed it in service after 2019. .04 Section 280F(c)(2) requires a reduction to the amount allowable as a deduction to the lessee of a leased passenger automobile. Pursuant to § 280F(c)(3), the reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Under § 1.280F-7(a), this reduction is accomplished by requiring the lessee to include in gross income an amount determined by applying a formula to a dollar amount obtained from a table. .05 Table 3 of this revenue procedure provides the dollar amount used by lessees of passenger automobiles with a lease term beginning in 2021 to determine the income inclusion amount for those passenger automobiles. The table provides dollar amounts for a range of fair market values. SECTION 3. SCOPE .01 The limitations on depreciation deductions in Tables 1 and 2 in section 4.01(2) of this revenue procedure apply to passenger automobiles, other than leased passenger automobiles, that are placed in service by the taxpayer in calendar year 2021, and continue to apply for each taxable year that the passenger automobile remains in service. .02 The dollar amount in Table 3 of this revenue procedure applies to leased passenger automobiles with a lease term beginning in calendar year 2021, and continues to apply for each taxable year during the lease. .03 See Rev. Proc. 2016-23, 2016-16 I.R.B. 581, for passenger automobiles placed in service or leased during calendar year 2016, Rev. Proc. 2017-29, 2017-14 I.R.B. 1065, for passenger automobiles placed in service or leased during calendar year 2017, Rev. Proc. 2018-25, 2018-18 I.R.B. 543, for passenger automobiles placed in service or leased during calendar year 2018, Rev. Proc. 2019-26, 2019-24 I.R.B. 1323, for passenger automobiles placed in service or leased during calendar year 2019, and Rev. Proc. 2020-37, 2020-33 I.R.B. 381, for passenger automobiles placed in service or leased during calendar year 2020. SECTION 4. APPLICATION .01 Limitations on Depreciation Deductions for Certain Automobiles. (1) Amount of the inflation adjustment. Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the C-CPI-U automobile component for October of the preceding calendar year exceeds the automobile component of the CPI (as defined in § 1(f)(4)) for October of 2017, multiplied by the amount determined under § 1(f)(3)(B). The amount determined under § 1(f)(3)(B) is the amount obtained by dividing the new vehicle component of the C-CPI-U for calendar year 2016 by the new vehicle component of the CPI for calendar year 2016, where the C-CPI-U and the CPI for calendar year 2016 means the average of such amounts as of the close of the 12-month period ending on August 31, 2016. Section 280F(d)(7)(B)(ii) defines the term “C-CPI-U automobile component” as the automobile component of the Chained Consumer Price Index for All Urban Consumers as described in § 1(f)(6). The product of the October 2017 CPI new vehicle component (144.868) and the amount determined under § 1(f)(3)(B) (0.694370319) is 100.592. The new vehicle component of the C-CPI-U released in November 2020 was 102.878 for October 2020. The October 2020 C-CPI-U new vehicle component exceeded the product of the October 2017 CPI new vehicle component and the amount determined under § 1(f)(3)(B) by 2.286 (102.878 - 100.592). The percentage by which the C-CPI-U new vehicle component for October 2020 exceeds the product of the new vehicle component of the CPI for October of 2017 and the amount determined under § 1(f)(3)(B) is 2.273 percent (2.286/100.592 x 100%), the automobile price inflation adjustment for 2021 for passenger automobiles. The dollar limitations in § 280F(a) are therefore multiplied by a factor of 0.02273, and the resulting increases, after rounding to the nearest $100, are added to the 2018 limitations to give the depreciation limitations applicable to passenger automobiles for calendar year 2021. This adjustment applies to all passenger automobiles that are placed in service in calendar year 2021. (2) Amount of the limitation. Tables 1 and 2 of this revenue procedure contain the depreciation limitation for each taxable year for passenger automobiles a taxpayer placed in service during calendar year 2021. Use Table 1 for a passenger automobile to which the § 168(k) additional first year depreciation deduction applies that is acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2021; use Table 2 for a passenger automobile for which no § 168(k) additional first year depreciation deduction applies. REV. PROC. 2021-31 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES ACQUIRED AFTER SEPTEMBER 27, 2017, AND PLACED IN SERVICE DURING CALENDAR YEAR 2021, FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $ 18,200 2nd Tax Year $ 16,400 3rd Tax Year $ 9,800 Each Succeeding Year $ 5,860 REV. PROC. 2021-31 TABLE 2 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES PLACED IN SERVICE DURING CALENDAR YEAR 2021 FOR WHICH NO § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $ 10,200 2nd Tax Year $ 16,400 3rd Tax Year $ 9,800 Each Succeeding Year $ 5,860 .02 Inclusions in Income of Lessees of Passenger Automobiles. A taxpayer must follow the procedures in § 1.280F-7(a) for determining the inclusion amounts for passenger automobiles with a lease term beginning in calendar year 2021. In applying these procedures, lessees of passenger automobiles should use Table 3 of this revenue procedure. REV. PROC. 2021-31 TABLE 3 DOLLAR AMOUNTS FOR PASSENGER AUTOMOBILES WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2021 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & later $51,000 $52,000 0 0 1 0 1 52,000 53,000 1 1 1 2 2 53,000 54,000 1 2 2 3 4 54,000 55,000 1 3 3 5 5 55,000 56,000 2 3 5 6 6 56,000 57,000 2 4 6 7 8 57,000 58,000 2 5 7 8 10 58,000 59,000 3 5 8 10 11 59,000 60,000 3 6 9 11 13 60,000 62,000 3 7 11 13 15 62,000 64,000 4 9 13 15 18 64,000 66,000 5 10 15 18 21 66,000 68,000 5 12 17 21 24 68,000 70,000 6 13 20 23 27 70,000 72,000 7 14 22 26 30 72,000 74,000 7 16 24 29 33 74,000 76,000 8 18 26 31 36 76,000 78,000 9 19 28 34 39 78,000 80,000 9 21 30 37 42 80,000 85,000 11 23 34 41 48 85,000 90,000 12 27 40 47 55 90,000 95,000 14 30 45 55 62 95,000 100,000 16 34 50 61 70 100,000 110,000 18 40 58 71 81 110,000 120,000 21 47 70 83 97 120,000 130,000 25 54 81 96 112 130,000 140,000 28 62 91 110 127 140,000 150,000 31 69 103 123 141 150,000 160,000 35 76 114 136 157 160,000 170,000 38 84 124 149 172 170,000 180,000 41 91 135 163 187 180,000 190,000 45 98 146 176 202 190,000 200,000 48 106 157 188 218 200,000 210,000 51 113 168 202 232 210,000 220,000 55 120 179 215 247 220,000 230,000 58 128 190 227 263 230,000 240,000 61 135 201 241 278 240,000 and over 65 142 212 254 293 SECTION 5. EFFECTIVE DATE This revenue procedure applies to passenger automobiles placed in service during calendar year 2021 or with a lease term beginning in calendar year 2021. SECTION 6. DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. Harvey of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Mr. Harvey at (202) 317-4640 (not a toll-free number). Rev. Proc. 2021-33 SECTION 1. PURPOSE This revenue procedure provides a safe harbor that permits a taxpayer to exclude certain items from “gross receipts” under §§ 448(c) and 6033 of the Internal Revenue Code (Code), as applicable, solely for purposes of determining eligibility to claim the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (March 27, 2020), as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), enacted as Division EE of the Consolidated Appropriations Act, 2021 (CAA), Public Law 116-260, 134 Stat. 1182 (December 27, 2020), and extended by section 9651 of the American Rescue Plan Act of 2021 (ARP), Public Law 117-2, 135 Stat. 4 (March 11, 2021). The items covered by the safe harbor are: (1) the amount of the forgiveness of a Paycheck Protection Program (PPP) loan under section 7(a)(37) or 7A of the Small Business Act, (2) a grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), enacted as Title III of Division N of the CAA, and (3) a restaurant revitalization grant under section 5003 of the ARP. SECTION 2. BACKGROUND .01 Employee Retention Credit. (1) As originally enacted, section 2301 of the CARES Act permits eligible employers, including tax-exempt organizations, that pay qualified wages after March 12, 2020, and before January 1, 2021, to claim an employee retention credit against applicable employment taxes. Section 206 of the Relief Act adopted amendments and technical changes to section 2301 of the CARES Act for qualified wages paid after March 12, 2020, and before January 1, 2021. Section 207 of the Relief Act amended section 2301 of the CARES Act to extend the application of the employee retention credit to qualified wages paid after December 31, 2020, and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time, in addition to making other changes. Section 9651 of the ARP added § 3134 to the Code, providing an employee retention credit for wages paid after June 30, 2021, and before January 1, 2022.1 (2) Notice 2021-20, 2021-11 I.R.B. 922 (March 15, 2021), and Notice 2021-23, 2021-16 I.R.B. 1113 (April 19, 2021), provide additional guidance on eligibility for, and the claiming of, the employee retention credit for qualified wages paid after March 12, 2020, and before January 1, 2021, and for qualified wages paid after December 31, 2020, and before July 1, 2021, respectively. Notice 2021-49, 2021-34 I.R.B. 316 (August 23, 2021) provides separate guidance on the employee retention credit under § 3134 of the Code for qualified wages paid after June 30, 2021, and before January 1, 2022. .02 Eligible Employer. The employee retention credit is available only to employers that are eligible employers, as defined in section 2301(c)(2) of the CARES Act, as amended by section 207 of the Relief Act, or § 3134(c)(2) of the Code, for the applicable calendar quarters in 2020 and 2021. An employer may be eligible for the employee retention credit if its gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter. The method used to determine if an employer is an eligible employer based on experiencing the requisite percentage decline in gross receipts varies depending on the calendar quarter for which the employer is determining its eligibility for the employee retention credit. Taxpayers should refer to section III.E. of Notice 2021-20, section III.C. of Notice 2021-23, and section III.D of Notice 2021-49 for these rules, as applicable. All persons treated as a single employer under § 52(a) or (b) of the Code, or § 414(m) or (o) of the Code, are treated as a single employer for purposes of the employee retention credit. See Notice 2021-20, section III.E. and § 3134(d) of the Code. .03 PPP Loans and interaction with the employee retention credit. (1) Section 1102 and 1106 of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 (Public Law 116–142) and the Economic Aid Act, established the PPP, which allows “eligible recipients” to obtain loans guaranteed by the Administrator of the Small Business Administration under section 7(a)(36) of the Small Business Act (15 U.S.C. § 636(a)(36)) (PPP First Draw Loans). Section 1109 of the CARES Act provides additional authority to permit certain lenders to participate in the PPP by making loans (Section 1109 Loans) that must be consistent, to the maximum extent practicable, with the terms and conditions for loans under the PPP. Section 311 of the Economic Aid Act authorized additional loans to be made to “eligible entities” (PPP Second Draw Loans) under section 7(a)(37) of the Small Business Act (15 U.S.C. § 636(a)(37)). (2) Section 1106 of the CARES Act, originally codified at 15 U.S.C. § 9005, provides that an eligible recipient of a PPP First Draw Loan is eligible for forgiveness of all or a portion of the principal amount of the PPP First Draw Loan if certain conditions are met. Section 304 of the Economic Aid Act redesignated, transferred, and amended section 1106 of the CARES Act as section 7A of the Small Business Act, to be inserted after section 7 of the Small Business Act (15 U.S.C. § 636). Section 311 of the Economic Aid Act provides that an eligible entity is eligible for forgiveness of a PPP Second Draw Loan in the same manner as an eligible recipient with respect to a PPP First Draw Loan made under section 7(a)(36) of the Small Business Act. Section 1109(d)(2)(D) of the CARES Act provides that the terms and conditions for forgiveness of Section 1109 Loans must be consistent, to the maximum extent practicable, with the terms and conditions under section 1106 of the CARES Act regarding PPP First Draw Loans. Collectively, this revenue procedure refers to PPP First Draw Loans, Section 1109 Loans, and PPP Second Draw Loans as “PPP Loans,” all of which are covered loans under either section 7(a)(37) or 7A of the Small Business Act. (3) An employer that receives a PPP Loan may claim the employee retention credit available to it for the calendar quarter, subject to the restriction that the qualified wages may not be counted both for the employee retention credit and as payroll costs that are paid during the covered period (payroll costs) to the extent the payroll costs qualify the eligible employer for forgiveness under the PPP. See section 2301(g) of the CARES Act, section 7A(a)(12) of the Small Business Act, as amended by section 206(c)(1) of the Relief Act, and § 3134(h)(1)(A) and (h)(2) of the Code. See also Section III.I of Notice 2021-20. .04 Certain grants and interaction with the employee retention credit. (1) Section 324 of the Economic Aid Act authorizes the Small Business Administration to make grants to eligible live venue, performing arts, and museum operators and promoters (shuttered venue operator grants). Shuttered venue operator grant funds may be used for certain qualifying expenses, including payroll costs, which has the same meaning as under section 7(a)(36)(A) of the Small Business Act. See section 324(d)(2)(A) of the Economic Aid Act. Section 5003 of the ARP provides grants to qualifying restaurants and food vendors (restaurant revitalization grants). Restaurant revitalization grants may be used for certain qualifying expenses, including payroll costs, which has the same meaning as under section 7(a)(36)(A) of the Small Business Act, except that the term does not include qualified wages taken into account in determining the employee retention credit under section 2301 of the CARES Act. See section 5003(a)(8)(A) of the ARP. Collectively, these two grants are referred to as “ERC-Coordinated Grants” in this revenue procedure. (2) Under § 3134(h)(1)(B) and (C) of the Code, an employer that receives an ERC-Coordinated Grant may claim the employee retention credit available to it for the calendar quarter, subject to the restriction that the qualified wages may not be counted both for the employee retention credit and as payroll costs in connection with an ERC-Coordinated Grant. .05 Exclusion from gross income. (1) Sections 276(a)(1), 276(b), and 278(a) of the COVID-related Tax Relief Act each provide that no amount is included in the gross income of an eligible recipient or eligible entity, as applicable, by reason of the forgiveness of a PPP First Draw Loan, Section 1109 Loan, or PPP Second Draw Loan, respectively, and that no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. (2) Section 278(d) of the COVID-related Tax Relief Act provides guidance regarding the Federal income tax consequences of shuttered venue operator grants. Specifically, section 278(d) of the COVID-related Tax Relief Act provides that no amount of a shuttered venue operator grant is included in the gross income of an eligible recipient, and that no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. (3) Section 9673 of the ARP provides guidance regarding the Federal income tax consequences of a restaurant revitalization grant. Specifically, section 9673 of the ARP provides that no amount of the restaurant revitalization grant is included in the gross income of an eligible recipient, and that no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. .06 Gross receipts. (1) For purposes of determining eligibility to claim the employee retention credit, other than in the case of a tax-exempt entity, “gross receipts” are defined by reference to § 448(c) of the Code. See section 2301(c)(2)(B)(i) of the CARES Act; section 2301(c)(2)(A)(ii)(II) of the CARES Act as amended by section 207(d) of the Relief Act; § 3134(c)(2)(A) of the Code. Section 1.448-1T(f)(2)(iv) of the Income Tax Regulations provides, in relevant part, that “gross receipts” are the gross receipts of the taxable year in which such receipts are properly recognized under the taxpayer’s accounting method used in that taxable year for Federal income tax purposes, determined without regard to § 1.448-1T. For this purpose, gross receipts include total sales, net of returns and allowances, and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources, regardless of whether that income is included in the taxpayer’s gross income under § 61 of the Code. For example, gross receipts include tax-exempt interest within the meaning of § 103 of the Code even though that interest is not included in the taxpayer’s gross income under § 61 of the Code. In addition, gross receipts are reduced by the taxpayer’s adjusted basis in the property sold for sales of capital assets as defined in § 1221 of the Code, or sales of property described in § 1221(2), relating to property used in a trade or business. (2) In the case of a tax-exempt organization determining eligibility to claim the employee retention credit, “gross receipts” are defined by reference to § 6033 of the Code. See section 2301(c)(2)(C) of the CARES Act as amended by section 206(a) of the Relief Act; § 3134(c)(2)(C) of the Code. Section 1.6033-2(g)(4) of the Income Tax Regulations provides, in relevant part, that “gross receipts” are the gross amount received by the organization during its annual accounting period from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting those amounts. Thus, for a tax-exempt organization, “gross receipts” includes, but is not limited to (i) the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting those amounts, (ii) the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of those amounts, (iii) gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption, the net income or loss from which may be required to be reported on Form 990-T, Exempt Organization Business Income Tax Return (and Proxy Tax Under Section 6033(e))), (iv) the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and (v) the gross amount received as investment income, such as interest, dividends, rents, and royalties. In determining its gross receipts, a tax-exempt organization should generally use the same accounting method that it regularly uses to keep its books and records. For example, if a donor makes an unconditional pledge to a tax-exempt organization and the pledge will be paid over three years, a tax-exempt organization using an accrual method of accounting discounts the pledge to its present value and treats that amount as gross receipts in the first year, whereas a tax-exempt organization using the cash method of accounting treats only the amount of the pledge it actually receives each year as gross receipts for that year. SECTION 3. EMPLOYEE RETENTION CREDIT GROSS RECEIPTS SAFE HARBOR .01 In general. 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. Therefore, unless an employer uses the safe harbor as provided in this section 3, the employer must include the amount of the forgiveness of a PPP Loan and the amount of any ERC-Coordinated Grants in gross receipts for determining eligibility to claim the employee retention credit with respect to applicable calendar quarters in 2020 and 2021. .02 Safe Harbor. 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. 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. 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. .03 Application of safe harbor. 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. .04 Manner of electing to use the safe harbor. 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. .05 Revocation of safe harbor election. 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. SECTION 4. SUBSTANTIATION REQUIREMENTS An employer must retain in the employer’s records support for the credit claimed, including the use of the safe harbor set forth in this revenue procedure. See also Notices 2021-20, 2021-23, and 2021-49. SECTION 5. EFFECT ON OTHER DOCUMENTS .01 Notice 2021-20, 2021-11 I.R.B. 922 (March 15, 2021), is amplified. .02 Notice 2021-23, 2021-16 I.R.B. 1113 (April 19, 2021), is amplified. .03 Notice 2021-49, 2021-34 I.R.B. 316 (August 23, 2021), is amplified. SECTION 6. EFFECTIVE DATE This revenue procedure applies for purposes of determining eligibility to claim the employee retention credit for wages paid after March 12, 2020, and before January 1, 2022. SECTION 7. PAPERWORK REDUCTION ACT Any collection of information associated with this notice has been submitted to the Office of Management and Budget for review under OMB control number 1545-0029 in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). An agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a valid OMB control number. SECTION 8. DRAFTING INFORMATION The principal author of this revenue procedure is Anna Gleysteen of the Office of the Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the Department of the Treasury and the Internal Revenue Service participated in its development. For further information on this revenue procedure regarding taxable entities, contact Ms. Gleysteen at (202) 317-7007 (not a toll-free call). For further information on this revenue procedure regarding exempt organizations, contact Amber MacKenzie at (202) 317-4809 (not a toll-free number). 1 The modifications made by the Relief Act or the ARP to the employee retention credit are not relevant to this revenue procedure, except to the extent specifically discussed herein. Nonetheless, references to the employee retention credit and other related terms in this revenue procedure should be read to incorporate the changes to the applicable rules made by the Relief Act and the ARP for the relevant calendar quarters in 2020 and 2021. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the effect: Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare with modified, below). Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them. Modified is used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare with amplified and clarified, above). Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling. Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is superseded. Supplemented is used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series. Suspended is used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The following abbreviations in current use and formerly used will appear in material published in the Bulletin. A—Individual. Acq.—Acquiescence. B—Individual. BE—Beneficiary. BK—Bank. B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cumulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Cooperative. Ct.D.—Court Decision. CY—County. D—Decedent. DC—Dummy Corporation. DE—Donee. Del. Order—Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Employer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduciary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Foreign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Federal Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grantee. GP—General Partner. GR—Grantor. IC—Insurance Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—Nonacquiescence. O—Organization. P—Parent Corporation. PHC—Personal Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Partnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Real Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsidiary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z—Corporation. Numerical Finding List1 Numerical Finding List Bulletin 2021–34 Announcements: Article Issue Link Page 2021-12 2021-31 I.R.B. 2021-31 267 2021-13 2021-33 I.R.B. 2021-33 314 2021-14 2021-33 I.R.B. 2021-33 315 Notices: Article Issue Link Page 2021-39 2021-27 I.R.B. 2021-27 3 2021-40 2021-28 I.R.B. 2021-28 15 2021-41 2021-29 I.R.B. 2021-29 17 2021-42 2021-29 I.R.B. 2021-29 19 2021-38 2021-30 I.R.B. 2021-30 155 2021-44 2021-31 I.R.B. 2021-31 166 2021-45 2021-31 I.R.B. 2021-31 170 2021-47 2021-32 I.R.B. 2021-32 269 2021-46 2021-33 I.R.B. 2021-33 303 2021-48 2021-33 I.R.B. 2021-33 305 2021-49 2021-34 I.R.B. 2021-34 316 Proposed Regulations: Article Issue Link Page REG-107705-21 2021-30 I.R.B. 2021-30 162 REG-102951-16 2021-32 I.R.B. 2021-32 272 Revenue Procedures: Article Issue Link Page 2021-28 2021-27 I.R.B. 2021-27 5 2021-29 2021-27 I.R.B. 2021-27 12 2021-24 2021-29 I.R.B. 2021-29 19 2021-14 2021-30 I.R.B. 2021-30 158 2021-30 2021-31 I.R.B. 2021-31 172 2021-31 2021-33 I.R.B. 2021-33 324 2021-33 2021-34 I.R.B. 2021-34 327 Revenue Rulings: Article Issue Link Page 2021-12 2021-27 I.R.B. 2021-27 1 2021-13 2021-30 I.R.B. 2021-30 152 2021-14 2021-31 I.R.B. 2021-31 164 Treasury Decisions: Article Issue Link Page 9951 2021-30 I.R.B. 2021-30 25 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2020–27 through 2020–52 is in Internal Revenue Bulletin 2020–52, dated December 27, 2020. Finding List of Current Actions on Previously Published Items1 Bulletin 2021–34 How to get the Internal Revenue Bulletin INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletins are available at www.irs.gov/irb/. We Welcome Comments About the Internal Revenue Bulletin If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave. NW, IR-6230 Washington, DC 20224.