The Employee Retention Credit (ERC) is a refundable payroll tax credit for which business organizations, including tax-exempt organizations, may be eligible. The ERC was initially created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, then extended and modified by the Taxpayer Certainty and Disaster Tax Relief Act of 2020. An additional extension of the credit was granted with the American Rescue Plan Act in March 2021, extending the credit through the end of the year.
Criteria to Qualify
A nonprofit organization may be eligible for the credit if its operations were either fully or partially suspended due to a COVID-19 related governmental order or had a significant decline in gross receipts. To claim the ERC in any given calendar quarter, nonprofit organizations must meet one of the following criteria during that quarter:
- Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19
- The organization experienced a significant decline in gross receipts during the calendar quarter compared to 2019
- Specifically, for 2020, gross receipts for the 2020 quarter declined more than 50% when compared to the same 2019 quarter
- Eligibility for the credit continues through the 2020 quarter in which gross receipts are greater than 80% of gross receipts in the same 2019 quarter
- For 2021, employers’ gross receipts eligibility threshold is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019. A safe harbor is also provided, allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility
- Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility
Even if you did not experience a decline in revenues, your organization might still be eligible for the ERC under the suspension of operations requirement. The IRS issued Notice 2021-20, which provides some guidance on “partial suspension.” Notice 2021-20 suggests that modifications resulting in a reduction of 10% or more of the employer’s ability to provide goods or services would be more than a nominal portion of operations. For example, if you conduct activities in schools or other public spaces that were closed due to government orders, experienced supply chain interruptions from vendors, or could not access equipment, you may be regarded as having to suspend activities indirectly due to a government order. If this is the case, you may be eligible for the ERC under your unique circumstances. It is unnecessary that all activities are suspended but rather only more than a “nominal amount.”
Defining Gross Receipts for a Nonprofit
For tax-exempt entities, gross receipts will be measured consistently with Form 990 rules. Gross receipts include, but are not limited to, contributions, gifts, grants, dues or assessments from members or affiliated organizations, or amounts received from sales or for services. Gross receipts also include investment income such as dividends and interest and the gross proceeds from any asset sale. However, unrealized gains and losses are excluded, as are in-kind contributions of services and rent.
What wages qualify for the Employee Retention Credit
The credit the organization receives is based on qualified wages. Qualified wages are certain wages paid to employees, including healthcare costs, during the periods discussed above.
For 2020, an organization is considered a small employer if they have 100 or fewer full-time employees. For 2021 that amount is increased to 500 or fewer full-time employees. Organizations with full-time employees over those amounts are considered large employers. Smaller eligible organizations may claim a credit for all wages paid to employees. In contrast, qualified wages for large employers only include wages paid to employees that are not providing services to the employer. This favorable change broadens the number of eligible nonprofit organizations claiming the ERC for all wages paid to employees, including wages paid to employees who are providing services.
Maximum Credit Amount
For amounts paid between March 13, 2020, and December 31, 2020, the credit is equal to 50% of qualified wages up to a maximum of $10,000 of wages per employee for the year. These qualified wages would equal a maximum credit of $5,000 per employee for 2020. This credit can still be claimed by filing Form 941-X.
For amounts paid between January 1, 2021, and December 31, 2021, the credit equals 70% of qualified wages up to a maximum of $10,000 of wages per employee per quarter, equaling a maximum credit of $28,000 per employee for 2021.
ERC and PPP
When the CARES Act was initially created, organizations receiving a Paycheck Protection Program (PPP) loan were ineligible for the ERC. This rule changed with the new law, and while this restriction no longer exists, the payroll costs included in the PPP loan forgiveness calculation are not eligible for the wages used to claim the ERC. In other words, you cannot double-dip!
This ruling also serves as a good reminder for any organization that receives support from federal, state, and local governments to avoid claiming the ERC on any wages applied directly to a grant agreement. Organizations need to be aware of any limitations or restrictions that may exist with other funding sources to avoid the potentially costly mistake of claiming the same wages more than once.
As with many of the programs created under the CARES Act and subsequent relief acts, it will be on the nonprofit organization to adequately substantiate its eligibility for the ERC, and the wages claimed. The following includes some of the types of documentation that should be maintained:
- Documentation to support eligibility, including
- any governmental order(s) to suspend the nonprofit organization’s operations;
- any records the nonprofit organization relied upon to determine whether more than a nominal portion of its operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on its operations;
- any records used to determine there was a significant decline in gross receipts; or
- records of which employees received qualified wages and in what amounts.
- For large eligible employers, work records and documentation showing that wages were paid for time an employee was not providing services
- Documentation to support the amount of allocable qualified health plan expenses
- Copies of any Form 7200 and federal employment tax returns submitted to the IRS or provided to third-party payers supporting credits claimed.
The Employee Retention Credit can provide a much-needed benefit to qualified nonprofit organizations impacted by COVID-19. Every organization should assess its own unique circumstances to determine if they meet the eligibility criteria. Be sure to reach out to your CRI advisor if you have questions or require further guidance regarding your business’ eligibility.