The Employee Retention Credit (ERC) is a refundable tax credit for employers. From the lack of clear guidance to amendments to its early termination, the ERC has been a roller coaster ride since it was introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. With everything happening in the world over the last few years, it is not surprising that some nonprofit leaders have not had the time to determine if their organization could benefit from ERC. If that happens to be you, you are in luck! The regulations surrounding ERC have been set for over a year now, so there is much less speculation and a lot more information available to you. If your nonprofit has less than 100 full-time employees, here is what you need to know.
Are you an eligible employer?
In order to be eligible for the Employee Retention Credit, a nonprofit must meet one of the following criteria:
Experience a significant decline in gross receipts, or
Suffer a full or partial shutdown due to governmental orders, or
Be a recovery startup business (for third and fourth quarters of 2021 only)
Although this sounds easy enough, determining if your organization has suffered a “full or partial shutdown” is arguably one of the most unclear areas of ERC. The IRS website tries to help with an FAQ page regarding full or partial shutdowns, but readers are warned, “This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.” Therefore, the safest route to qualify for ERC is with a significant decline in gross receipts.
What is considered a significant decline in gross receipts?
Since 2019 is the last full calendar year before the pandemic, this is the “control” year used to determine if there was a significant decline in 2020 or 2021. Gross receipts are totaled by quarter, and then compared to the corresponding quarter in 2019. For a nonprofit organization, gross receipts include all support (donations, grants, etc.) along with revenues and investment income. Revenue includes activities within the organization’s exempt purpose, as well as unrelated business activities. Investment income includes interest, dividends and the gross receipts of any sales without the reduction of the cost basis of the investment sold. These amounts are determined on the same accounting basis that the organization uses for its financial reporting.
A significant decline in gross receipts is defined differently for 2020 than it is for 2021:
2020: Gross receipts are less than 50% of the gross receipts in the same quarter in 2019.
2021: Gross receipts are less than 80% of the gross receipts in the same quarter in 2019.
The ERC qualification starts when the organization has a significant decline and continues until the quarter after the organization is no longer experiencing the decline.
What is a recovery startup business?
Recovery startup businesses are also eligible for ERC. The IRS defines a recovery startup business as an employer which:
Began carrying on any trade or business after February 15, 2020 and
For which the average annual gross receipts of such employer for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined does not exceed $1,000,000.
Congratulations, you are an eligible employer! How much credit can you claim?
The Employee Retention Credit is based on “qualified wages.” If an employer is eligible for ERC due to a full or partial shutdown, your qualified wages are those wages paid to employees during the shutdown period. For employers who are eligible due to a decline in gross receipts, your qualified wages are those wages paid during the quarters in which the employer is eligible.
In order to prevent double benefit, qualified wages do not include any of the following:
Wages taken into account for the paid sick and/or family medical leave credits
Wages paid to employees for which the employer received a work opportunity credit
Wages reported on the Paycheck Protection Program loan forgiveness application (up to the amount of the loan that was forgiven)
In addition to qualifying wages, certain health plan expenses can also factor into the ERC.
Again, the credit amounts are different for 2020 and 2021:
2020: 50% of qualified wages (capped at $10,000 per eligible employee), maximum of $5,000 per employee for the calendar year.
2021: 70% of qualified wages (capped at $10,000 per eligible employee), maximum of $7,000 per employee per quarter. NOTE: Recovery startup businesses are limited to $50,000 per calendar quarter.
How do you claim the Employee Retention Credit?
To take advantage of this credit, you must complete a Form 941-X for each quarter in which your organization qualifies for ERC. Even if your organization qualifies for ERC in the first quarter of 2020, ERC only affects wages paid after March 12, 2020. As a result, wages paid after March 12, 2020 and before April 1, 2020 are claimed on a separate line of the Form 941-X for the second quarter of 2020.
How long do you have to claim the Employee Retention Credit?
Forms 941-X claiming ERC for the calendar year 2020 must be filed by April 15, 2024. Amended returns claiming ERC for the calendar year 2021 must be filed by April 15, 2025.
How long will it take to get your refund?
Processing times vary, so this question cannot be answered with any certainty. The IRS does have a webpage devoted to filing updates. This webpage indicates that as of January 4, 2023, the inventory of unprocessed Forms 941-X was approximately 395,000. With the beginning of income tax season, nine months or more is probably an optimistic wait time.
