If Congress had adhered to the original rules of the Paycheck Protection Plan (PPP) – loan holders granted under the Paycheck Protection Program could not also take advantage of the Loan Loan – we would not find ourselves with the problem that we have today.
But Congress didn’t. Holders of waived PPP loans can take advantage of the employee loyalty loan, provided that the wage costs covered by the waived loan are not included as eligible costs. This in turn opened another can of worms.
How can holders of waived PPP loans who are availing of the Loan Loan due to a significant decrease in their gross receipts account for this gross receipts? The IRS has created another safe haven for this dilemma. This Safe Harbor applies to the employee loyalty credit retrospectively from March 12, 2020 to December 31, 2021.
All of this drama may be for very little, however, as the employee loyalty loan will likely go to the junkyard a quarter early for most employers – at the end of the third quarter instead of the fourth quarter – as the Senate got its repeal in its gigantic form Infrastructure bill added.
Again the law of unintended consequences
One way to be eligible for Employee Loyalty Credit is if you have suffered a significant drop in gross earnings. The decline does not have to be due to the pandemic. For 2020 the significant decrease in gross income was 50% compared to the same quarter of 2019. For 2021, the significant decrease is generally 20% compared to the same quarter of 2019. Gross income is defined in relation to IRC § 448 and includes:
- Total sales (ie minus returns and allowances).
- Amounts received for services.
- Income from investments and from ancillary or third-party income, regardless of whether the income is part of your gross income.
And here is the unintended consequence of defining gross income with reference to IRC § 448: If your PPP loan is waived, do not include the waived amount in the gross income of the company. After all, that is the entire purpose of the loan being granted.
However, you need to include the amount of the waived loan in your gross earnings and this could cause your gross earnings to increase which will affect your eligibility for the loan.
It’s a small but vicious circle.
Safe haven
The safe harbor is optionally available to you. After that, you can exclude the amount of your granted PPP loan from your gross earnings just to determine your eligibility for the loan. You make this choice by simply claiming credit on your Form 941. Using them can increase your chances of qualifying for credit.
If you don’t want to take advantage of the Safe Harbor, you’ll need to add the amount of your PPP loan made to your gross earnings.
Warning: Alone means exclusively. The concept of gross receipts is used for a variety of purposes throughout the Tax Code, and the IRS stressed that the safe haven cannot be used for any other tax purpose.
The creditworthiness is determined separately for each calendar quarter, as is this Safe Harbor. If you choose to use it, you need to use it consistently for each calendar quarter. In addition, you must apply it to all employers who are treated as a single employer under the Loyalty Credit Rules.
You can also revoke your use of the safe harbor. But the rule of consistency also applies here. Result: You must submit Form 941-X for all calendar quarters affected by the revocation.
