Since the Consolidated Appropriations Act, non-profit organizations can qualify as eligible employers for the Employee Retention Tax Credit. Even a tax-exempt organization that received Paycheck Protection Program (PPP) loans can claim a maximum credit of up to $26,000 per employee based on wages paid during the Coronavirus pandemic.
Employee retention tax credits are a government initiative created during the pandemic to incentify and encourage employers and tax-exempt organizations who kept their employees on payroll during the outbreak. Businesses that have also obtained the Paycheck Protection Program (PPP) can also benefit from this fully refundable tax credit.
While tax-exempt and non-profit organizations were not originally allowed to qualify for the ERC in the original Coronavirus Aid Relief and Economic Security Act (CARES ACT), amendments were made in the CAA and American Rescue Plan Act allowing them to apply for the ERTC.
There are two ways to receive ERC qualification — a decline in gross receipts, full or partial suspension of a nonprofit’s services, or their supply chain due to a government-ordered shutdown.
Determining when the above conditions are met depends on the eligibility route your nonprofit selects. The contribution and related receivables would be recognized in the period your nonprofit overcome the conditions.
In instances where the conditions are met over time, the contribution revenue should be recognized as qualifying payroll costs are incurred and the eligibility requirements are met. Like every other eligible business owner, nonprofits must also their claim as quickly as possible to ensure they meet the ERTC deadline.
All nonprofit employers must meet at least one of the criteria below to qualify for this payroll tax refund.
- A significant decline in gross revenue of 50% in 2020 or 20% in 2021 when compared to the gross receipts for the same calendar quarter in 2019.
- Fully or partially suspended operations during the Covid-19 pandemic due to an order from an appropriate governmental authority.
- Tax-exempt organizations that began operations on or after Feb 15, 2020, can qualify as recovery startup businesses and claim a refund for the third and fourth quarters of 2021.
The refundable portion of qualified wages paid in ERC credit is first determined by whether your nonprofit is considered a large or small employer. The original Coronavirus Relief Act qualification criteria of a 100-employee maximum in 2020 were then raised to 500 employees for 2021 claims.
- Small Employers = 100 or fewer full-time employees in 2020 or 500 or fewer in 2021
- Large Employers = Greater than 100 full-time employees in 2020 or greater than 500 in 2021
In either year, having more than 100/500 employees will not disqualify a non-profit entity from qualifying for ERC credits, but it does change with eligible wages that can be refunded. Owner wages are typically not considered eligible for an ERTC refund check.
Small employers can claim all wages paid, while large employers can only claim qualified wages paid to employees who were unable to perform their regular duties. The maximum credit, however, stays the same at $5,000 per employee in 2020, and $7,000 per employee, per quarter in 2021. The maximum benefits over both years are equal to $26,000 per employee, while a recovery startup business can only claim a maximum of $100,000 total for all employees.
Gross Receipts Test
Without deducting the expenses incurred in raising and collecting grants and gifts, the amounts received are classified under gross receipts. Likewise, payments received as a portion of assessments and dues from members and affiliated organizations are categorized under gross receipts.
Also included in gross receipts are the receipts or sales from business activities and amounts received from investments such as dividends, rents, royalties, and interest.
For total sales, amounts realized by the organization through total sales are designated under gross receipts. Also classified under gross receipts is any amount received for Services provision, with the inclusion of allowances and net returns.
Gross receipts also incorporate income generated through dividends, royalties, gifts, rents, grants, and all other investment streams.
For an organization to be eligible for the payroll tax credits for nonprofits, it must give evidence of the actual amount of proceeds rather than including only the net gain. Let’s say an organization purchased a stock at the rate of $16 000 a few years back. Then later sold it for $20,000 in the current quarter. Ordinarily, the profit of $4 000 will reflect on the financial statement as a gain received through the sale of the stick. On the contrary, an organization must include $20,000 of proceeds instead of just $4000 to qualify for ERC for nonprofits.
Government Orders Test
IRS guidance allows for 501(c)(3)’s and non-profit organizations to claim employee retention credits based on a government-ordered shutdown that disrupted normal business operations.
While no double-dipping of funding is allowed, as long as a local, state, or federal governmental order was issued due to covid-19, a nonprofit company can qualify for the ERTC even if they received PPP loans.
If a non-profit organization experienced an interruption of normal business operations due to the coronavirus pandemic, it may qualify as an eligible employer and claim the ERC. Some examples of government mandates that could have impacted a tax-exempt organization include:
- Full or partial shutdown, or supply chain disruptions from key vendors
- Limited capacity, reduced hours, or production loss due to new worker safety protocols
- Government orders to limit commerce or travel, or limited group meetings
When reporting receipt of employee retention tax credits, nonprofit employers are required to include important financial details about their refunds in these statements and disclosures.
Statement of Financial Position
ERC calculations should include the current receivable amount based on your portion of non-received credits and the conditions met. Assuming a nonprofit entity can meet the remaining conditions, a refundable ERC advance must be classified as a current liability.
Statement of Activities
ERC grant revenue must be reported in their applicable gross amounts by nonprofit organizations, and cannot be declared as net income along with contribution revenue, payroll taxes, and with other expenses.
A nonprofit organization is required to disclose detailed information how why they were eligible to claim the employee retention credit, well as the refund amounts they received.
The Return of Organization Exempt From Income Tax is a financial overview for nonprofits that includes a full breakdown of expenses and revenues, and all sources of income, including employee retention credit refunds.
All nonprofit organizations with over $250k in assets or those who receive over $100k in annual contributions must file an IRS Form 990 or a Form 990-EZ variant annually to maintain their tax-exempt status.
By declaring any ERC credits received as a government grant on a Form 990 Schedule A (Public Charity Status and Public Support), you can ensure your non-profit organization status will not be affected by an ERC refund,
Nonprofit companies that received a grant from the Department of Treasury or Internal Revenue Service should also attach a Form 990 Schedule B if they:
- Directly or indirectly received donor contributions valued at $5,000 or more
- Generated more than 2% of total donation revenue in the past fiscal year in the form of cash, noncash, or any other securities.
Non-profits who received employee retention credits would fall under this purview and must declare them as government grants received on their Schedule B along with providing services detailed refund information.
In this section of Form 990, you would enter the total amount of contributions from grants and similar payments from local, state, or federal government sources. This would include a cash refund received via the ERTC, as well as your Paycheck Protection Program (PPP) loan amounts.
- Line 1h — Add your refund amount here if over $5,000 or if amounting to more than 2% of total donation revenue.
- Line 1e — Report your retention credit refund amount here as contribution revenue from a government grant if not applicable to rules of Line 1h.
According to ASC 958-605 guidance (Not-for-Profit Entities: Revenue Recognition) tax-exempt businesses are permitted to report employee retention credit (ERC) refunds in the form of a government grant.
Based on their recommendation, the ERC is considered a conditional contribution, which must have both of the following:
- One or more barriers must be overcome before a recipient is entitled to the assets transferred or promised
- A right of return to the provider for assets transferred (or for a reduction, settlement, or cancellation of liabilities) or a right of release of the promisor from its obligation to transfer assets (or reduce, settle or cancel liabilities)
Some nonprofits interpret ERC eligibility the wrong way and have inadequate documentation for calculating the credit. The rise in ERC scams and noncompliance is partly the result of tax credit companies with aggressive positions on eligibility that approach businesses and assert false claims that every business is eligible for the ERC.
To avoid noncompliance, nonprofits should perform a thorough assessment and maintain documentation surrounding eligibility and the calculation of the ERC. Nonprofits should be prepared for their auditors, and potentially the IRS, to audit the eligibility requirements, conditions of the program, and credit calculations. If auditors determine that your organization failed to meet the eligibility requirements, there may be a potential material misstatement. In addition, noncompliance may lead to fines and having to repay the amounts received.
Nonprofit recipients of the ERC should begin discussions with auditors early in the audit process to ensure all parties agree with the treatment of the ERC. Tax-exempt organizations are eligible for the ERC because they are deemed to be engaged in a trade or business regarding the entirety of their operations. Examples of nonprofit organizations that have already taken advantage of the credit are hospitals, schools, museums, performing arts centers, and churches.
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