Gross receipts are the total sums collected from all sources throughout the organization’s yearly accounting period, minus any charges or expenses. There can be many reasons for calculating gross receipts for Employee Retention Credit. Additionally, businesses should understand what should and should not be included in gross receipts for Employee Retention Credit.
Furthermore, understanding the process of calculating gross receipts for ERC would also help save time for businesses.
Key ERC Credit Takeaways You Will Learn:
- Defining Gross Receipts: Understand the concept of gross receipts and their role in Employee Retention Credit calculations.
- Inclusions & Exclusions: Learn what to include and exclude when calculating gross receipts for the Employee Retention Credit.
- Gross Receipts Test: Gain insight into the Gross Receipts Test and its significance for the Employee Retention Credit.
- For-Profit vs. Not-For-Profit: Discover the differences in gross receipt calculations for for-profit and not-for-profit entities.
- Section 448 (C): Learn how gross receipts are determined under Section 448 (C) and its relevance to the Employee Retention Credit.
Breaking News Update to Gross Receipts for Employee Retention Credit: The IRS temporarily paused processing ERC Claims for the remainder of 2023 due to companies charging fees based on a percentage of the refund amount of their Employee Retention Credit claimed, plus a list of other reasons.
We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
Even though IRS processing has temporarily paused, you will still want to file now (if you qualify) because the IRS will resume processing tax credit claims in the order they are received.
Business owners that have not filed for the ERC Credit yet? DLA will provide a Free ERC Consultation where we’ll do a deep-dive analysis to determine if you even qualify for tax credit. Everything we do is by-the-book per IRS rules and guidelines.
What are Gross Receipts?
Gross receipts are the total amounts received by an eligible employer or organization from all sources during the annual financial statements period, less any expenses or even other deductible items. Consult your state or city to be sure you understand what gross receipts are in your area.
Here are a few common reasons why gross receipts must be calculated:
- Tax on gross receipts
- Loans for businesses
- Personal earnings
- Partial suspension
- Determination and qualifications for small businesses
Gross receipts tax is a tax on gross receipts that some firms in certain states are required to pay. You must look at your entire gross receipts for the period to determine how much tax you owe.
Businesses are usually subject to a gross revenues tax in social security. In addition to corporate income taxes, some governments levy a gross receipts tax. The gross receipts tax varies from one state to the next.
What is Included in Gross Receipts?
Gross receipts are defined as all income received or accumulated (in line with the entity’s accounting system) from any source, including product or service sales, interest, dividends, rents, royalties, fees, or commissions, fewer returns, and allowances.
Receipts are generally defined as “total income” (or “gross income” in the case of a sole proprietorship, independent contractor, or self-employed individual) plus “cost of products sold,” excluding net capital gains or losses, as defined and reported on IRS tax return forms.
- Taxes collected for and remitted to a taxing authority are included in gross receipts (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees)
- Proceeds from transactions between a concern and its domestic or foreign affiliates.
- Amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight management service provider, and freight management service provider. Other expenses, such as subcontractor fees, reimbursements for purchases made at the request of a customer, investment income, and employee-based expenditures like payroll taxes, are not allowed to be omitted from gross receipts.
What are Employee Retention Credit Gross Receipts for?
Even if the employer discovers a large decline in gross revenues in 2020 after January 1, 2021, the corporation is allowed to claim the Employee Retention Credit on qualified salaries given in 2020.
The employer can claim the advance payment credit by filing Form 941-X, Adjusted Company’s Quarterly Us Tax Return, or Request for Rebate wages for the purpose of reflecting changes in its tax liabilities.
The revenue process establishes a safe harbor that permits firms to remove these grants and forgiveness amounts from gross receipts for the sole purpose of calculating ERC eligibility for distressed employers.
Employee turnover, or the loss of organizational talent over time, is a major problem for most businesses. In 2019, about 42 million Americans willingly quit their employment. If present trends persist, more than one-third of employees will leave their jobs willingly by 2023.
What is Included in Gross Receipts for the Employee Retention Credit?
The entire gross receipts from all participants of the aggregation group are included in an employer’s gross receipts. Wages eligible for the ERC are half of the qualifying salary paid to employees by qualified businesses as employees per quarter in a subsequent quarter. Qualified wages paid include the employer’s qualified health plan costs that are appropriately allocated to the wages.
What Counts As Gross Receipts for Employee Retention Credit?
Gross receipts are all revenue, regardless of form, received or accumulated from any source, such as product or service sales, interest, dividends, rents, royalties, fees, or commissions, fewer returns, and allowances. Section 171.103 of the Tax Code defines Gross Receipts for an Employee Retention credit and describes what counts as gross receipts for Employee Retention Credit ERC:
- Every sale of tangible property to a buyer
- Every service done, with the exception of receipts collected from servicing debts backed by real property, that is in this area of the actual property.
- Every rental property
- Employment tax returns
- The use of an invention, copyright, logo, franchise, or license in this state.
- Every transaction of real estate in this state, including royalties from oil, gas, and other mineral holdings.
- Other transactions.
An organization generally does not have more than $5,000 in yearly gross receipts for the purposes of the gross receipts test if the organization received gross receipts of $7,500 or less during its first tax year, a total of $12,000 or less in gross receipts during its first two years, and a total of $15,000 or less in gross receipts during the immediately preceding two years plus the current year if the organization has been in existence for at least three years.
What is not Included When Calculating Gross Receipts for the Employee Retention Credit?
PPP loans and Shuttered Venue Operator Grants (SVOG) are not included in gross receipts under the Tax Relief Act of 2020. Restaurant Revitalization Fund (RRF) subsidies are likewise not included in Gross receipts under the American Rescue Plan (ARP) Act of 2021. Many people were concerned, however, that these goods were included in gross receipts as tax-free income. Read full restaurant ertc details here.
In Rev. Proc. 2021-33, it is stated that these funds are normally included in total receipts. However, when evaluating gross receipts for ERC eligibility, a Safe Harbor is offered that allows all three loans to be excluded.
How Do You Calculate Gross Receipts for Employee Retention Credit?
You might use an accounting system to organize your records and reports for convenient access to simplify your bookkeeping.
You calculate your gross receipts by:
- Choose a time period to measure, such as annual gross receipts and wages per employee.
- Decide whether your company uses cash or accrual accounting to determine when sales and income are recognized in your books.
- Gross receipts are calculated by adding all products and services sold throughout the period.
- Only add up sales where you delivered the goods or finished the services within the period while using accrual accounting.
- Only include sales when you have received payment in cash-basis accounting.
Total qualifying salaries and related health insurance premiums for each quarter must be computed and removed from your payment on Form 941, Employer’s Monthly Federal Taxable Income, to claim the new Employee Retention Credit ERC.
What is the Gross Receipts Test for the Employee Retention Credit?
Gross receipts tests are the gross revenue requirements to be fulfilled for the Employee Retention Credit. Several negative elements of the Code are exempted for taxpayers who fulfill the gross revenue requirement under IRC Section 448(c). The gross revenue test is satisfied if a taxpayer’s average annual gross receipts for the three taxable years immediately before that taxable year did not exceed $25 million, adjusted for inflation.
The Internal Revenue Service (IRS) has updated revenue procedures that might affect whether or not a taxpayer fulfills the gross receipts test.
Learn more about Employee Retention Credit IRS FAQs.
What is a Significant Decline in Gross Receipts for the Employee Retention Credit?
If a qualified employer experienced a dramatic decline in gross receipts, they may be eligible for the Employee Retention Credit.
An employer’s gross receipts are determined to have declined significantly between the first calendar quarter of 2020 and the first calendar quarter soon following the quarter in which total revenues were higher by over 80% of total revenue for the same calendar month in 2019.
If gross sales fall below that level, the employer must also consider whether the business’s 2020 quarterly gross receipts were greater than 80% as of the same calendar quarter in 2019.
If this is the case, the considerable decline in gross receipts came to an end in the first calendar quarter after the first calendar quarter in which an employer’s quarterly gross sales in 2020 exceed 80% of the same calendar quarter in 2019, or in the first calendar quarter of 2021.
Even if the employer discovers a large decline in gross revenues in 2020 after January 1, 2021, the corporation is allowed to claim the Employee Retention Credit on qualified salaries given in 2020 in the 3rd quarter as well as the 4th quarter.
COVID-19 is not required to be the cause of a large decline in gross receipts under the CARES Act. The IRS should have access to the documents for at least four years.
How are Gross Receipts Used for the Employee Retention Credit?
Gross receipts are used for the Employee Retention Credit for the entire amount of all cash and property receipts before any deductions for costs or other deductible items.
Gross revenues, unlike gross sales, include everything that is not linked to an entity’s typical economic activity, such as tax refunds, gifts, interest and dividend income, and so on.
Discounts and price modifications are not included in gross revenues. Instead of a corporate income tax or payroll taxes, several states and local tax authorities levy taxes on gross revenues.
What are Gross Receipts for a For-Profit Entity for the Employee Retention Credit?
For the purposes of the Employee Retention Credit, “gross receipts” for an employer that is not a tax-exempt employer have the same definition as it does under Internal Revenue Code section 448(c).
“Gross receipts” refers to all sales and all monies received for services throughout the taxable year, as defined by the section 448(c) rules. Gross revenues also include income from investments, as well as income from unrelated sources for loan forgiveness applications.
What are Gross Receipts for a Not-For-Profit Entity for the Employee Retention Credit?
In general, gross receipts for a non-profit organization may be described as the total amount of money received in a fiscal year from all sources before any expenditures are deducted.
How are Gross Receipts Determined Under Section 448 (C)?
The aggregation standards in section 448(c)(2) are used to assess whether the gross receipts test in section 448(c) is fulfilled.
The aggregation rules aggregate gross revenues if many taxpayers are categorized as a single company under the controlled organizational norms of sections 52(a) or 52(b), the periodic suspension, the related service company rules of section 414(m), or the regulations of section 414(n) (o).
These guidelines are intended to prohibit taxpayers from evading the gross revenues test under section 448(c) by separating their business into many linked businesses that might potentially fulfill the gross receipts test.
In theory, only corporations, including partnerships with C corporation partners 4, are subject to the section 448(c) gross revenues test; yet, for the small business deduction, all persons are subject to the section 448(c) federal income test.
Gross Receipts for Employee Retention Credit 2021
What defines a “significant decline in gross revenues” between the 2020 ERC and the 2021 ERC differs. A significant reduction in gross sales in 2020 is the moment when:
- Starts with the first calendar quarter of 2020, with gross receipts less than half of the previous calendar quarter; and
- Ends with a calendar quarterly after the first quarter in which gross receipts surpassed 80% of gross receipts in the previous calendar quarterly.
If total revenues for the relevant calendar quarter in 2021 were much less than 80% of total revenue for the corresponding calendar quarter in 2019, gross revenues for the 2021 ERC were severely reduced.
Employers can also choose to establish their eligibility for the 2021 ERC by comparing their gross revenues for the previous calendar quarter to the same quarter in 2019.
Employee Retention Credit 2021 Gross Receipts Definition
Gross receipts for an employer other than a tax-exempt organization for purposes of the Employee Retention Credit have the same meaning as when used under section 448(c) of the Internal Revenue Code (the “Code”). “Gross receipts” is defined under the section 448(c) rules as total sales (net of refunds and allowances) and all amounts obtained for services throughout the taxable year. Gross receipts also include any income from investments, as well as money from unrelated or outside sources.
Gross receipts consist of
- Investment revenue of the company;
- The total amount of donations, gifts, grants, and other comparable sums received; and
- The total amount received from members or connected organizations as dues or assessments.
Specific regulation for “severely financially troubled employers” was developed under the Rescue Plan, and it only applies to eligible earnings received in the third and fourth quarters of 2021.
Large businesses that meet the definition of a seriously financially distressed firm can consider all earnings provided to employees as qualifying wages, not only payments paid to employees who do not supply services.
Conclusion and Summary Related to Gross Receipts for Employee Retention Credit
Gross receipts are the total sums received by your firm from all sources throughout the tax year, minus the cost of goods sold and deductible costs.
Gross receipts are reported on Schedule C of your IRS Form 1040 if you conduct your business as a sole proprietorship or a single-member Limited Liability Company (LLC).
At this point, you should know what to include and what NOT to include in gross receipts.
ERC PDF Download of This News Article
Download a PDF version of Gross Receipts for Employee Retention Credit
Get Help on How to Apply for the Employee Retention Tax Credit (ERC / ERTC): Claim Up To a $26,000 Refund Per Employee for Your Business
Disaster Loan Advisors can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program.
Depending on eligibility, business owners and companies can receive up to $26,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount of employee retention tax credit your company qualifies for.
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