The Employee Retention Tax Credit and Nonprofit Eligibility
Wednesday, July 7, 2021
The COVID-19 virus brought about unprecedented challenges in every industry. For nonprofits with missions that are directly related to the humanitarian crisis (for instance, those who work with healthcare or to address food insecurity), need spiked. For these organizations, the community rose to the challenge and raised more money than ever before.
However, this need still outshined the revenue raised at times. And on the other end of the spectrum, most organizations with missions that did not immediately correlate with the pandemic experienced a drop in fundraising revenue outright.
Everyone in the industry is, therefore, very grateful for the additional aid provided by the federal government during this challenging time. The federal government passed a series of legislation actions designed to help businesses and nonprofits directly impacted by the negative effects of the virus.
A crucial part of the legislation passed was the Employee Retention Tax Credit (ERTC) and it’s changed slightly throughout the duration of the pandemic.
In this guide, we’ll be covering the background of the ERTC in a general sense and how it impacts your organization.
- What is the Employee Retention Tax Credit?
- History of the ERTC
- Employee Retention Tax Credit Qualifications for Nonprofits
- How to Claim the Employee Retention Tax Credit
Here at Jitasa, our name literally means, “the spirit of serving others.” We recognize that your organization serves your community every day and we want to be a part of that! By providing crucial financial information and services for nonprofits, we want to serve you so that you can serve the world.
That’s why we cover important topics like the Employee Retention Tax Credit for nonprofits. You can use this information to guide your organization to greater success, even though we just experienced one of the most challenging years in recent history. Let’s start at the beginning with a definition of the ERTC.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit is a refundable tax credit provided by the federal government to financially assist organizations that have been negatively impacted by the COVID-19 pandemic.
This tax credit is designed to help reward and financially support organizations who are able to retain their employees throughout the challenges of the pandemic. They’ll be able to receive a tax credit when they file their taxes or retroactively adjust their forms for 2020 and 2021. Keep in mind that IRS legislation can and does change, so it’s important to stay updated with the latest information from the source.
History of the ERTC
As we mentioned, the ERTC was developed in response to the COVID-19 pandemic. This means that it came about alongside the various pieces of legislation passed by the government during that time. Here, we’ve gone through a summary of the various pieces of legislation passed and how the ERTC was addressed in each one:
Passed March 27, 2020
This was the first piece of legislation passed in response to the COVID-19 pandemic to help organizations handle the negative financial implications of the virus. The CARES Act implemented certain policies such as the Paycheck Protection Program (PPP), Economic Injury Disaster Loans, additional aid for unemployment benefits, and more.
The CARES Act implemented the first iteration of the Employee Retention Tax Credit. In this version, it was very easy to receive the maximum credit offered as it provided a tax credit of 50% of the wages paid to retained employees up to $10,000. That meant that as long as your employees were paid at least $10,000, your nonprofit could max out the tax credit at $5,000.
Consolidated Appropriation Act
Passed December 27, 2020
The Consolidated Appropriation Act provided additional PPP loans for organizations with a maximum amount of $2 million. This Act also extended other certain programs from the CARES Act into 2021, such as the emergency unemployment relief and (of course) the employee retention tax credit.
This Act extended the ERTC to also include those who receive funds from the PPP, a provision that had not been allowed in the initial CARES Act. Therefore, if you received PPP funds, you can also claim the ERTC on top of that funding. Plus, the potential for credit claims was increased. Nonprofits could claim credit against 70% of wages, up to $10,000 for the first two quarters of 2021.
While the PPP and ERTC were combined in this act, your organization cannot take the ERTC credit against the wages paid with PPP loans. You can qualify for both programs independently, but they’re not able to be overlapped.
American Rescue Plan Act
Passed March 11, 2021
The American Rescue Plan Act is the most recent legislation to go into effect at the time of writing this article. This again extended the PPP to cover organizations of over 500 employees, allowed PPP recipients to obtain Shuttered Venue Operator Grants (SVOG), and provided vaccine funding as part of the benefits for organizations.
In terms of the ERTC, this legislation maintained that organizations could claim 70% of wages per quarter, extending the benefits throughout all of 2021 rather than just the first two quarters. The maximum amount the credit can be taken against is still $10,000 per quarter. This means that organizations can take up to $7,000 total per quarter of 2021, adding up to $28,000 throughout the 2021 calendar year.
While this was how the information was originally presented in the American Rescue Plan legislation, the IRS has released new information regarding the eligibility for ERTC funds in the fourth quarter of 2021. We’ll cover those changes later.
Employee Retention Tax Credit Qualifications for Nonprofits
A maximum tax credit of $28,000 during 2021 sounds like a pretty good deal! Unfortunately, not all nonprofits qualify for the ERTC. In general, there are two qualification standards that organizations have to meet in order to be eligible for this funding:
- You’ve experienced a 50% decline in gross receipts in any quarter of 2020.
- You’ve experienced a “full or partial suspension of operations during any calendar quarter because of governmental orders that limited commerce, travel, or group meetings due to COVID.”
The first of these qualification standards is fairly easy to determine. You simply have to conduct a calculation to determine if your gross receipts have experienced a decrease steep enough to qualify.
The second qualification is slightly more challenging to determine. There are many questions around what it means to have “fully or partially” suspended your operations. The IRS even compiled an ongoing list of FAQs that help determine this qualification.
If you’re not sure if you qualify for ERTC funds, you can always reach out to a nonprofit accountant to get more information. They’ll be able to help you conduct the calculations to see if you qualify under the first provision.
However, only you will know if you qualify under the second provision. A qualified nonprofit accountant can help you with some leading questions, but you’ll need to determine whether or not you can apply for these funds.
ERTC Changes for Q4 2021
The IRS released guidance on the Infrastructure Investment and Job Act that essentially eliminates the ERTC for virtually all organizations for Q4 of 2021. The only organizations that would qualify are those who are a "recovery startup business", which is defined as follows:
- You must have 1 or more employees (other than >50% owners and certain family members of theirs)
- You must be a startup company and started operations on or after 2/15/2020
- You must have gross receipts under $1 million dollars for 2020 and 2021, each year.
If you have been applying for the credits retroactively, there is no action needed. You simply won't apply for Q4 2021. If you have already applied in advance for the reduced tax withholdings for Q4 with your payroll provider in anticipation of being eligible for the ERC, you will need to pay this money back to the federal government.
How to Claim the Employee Retention Tax Credit
At this point, you might already have an inkling about whether or not your organization qualifies for ERTC funding. Now, you’ll be wondering how to claim it.
Work with a nonprofit accountant who can help you retroactively claim the tax credit for 2020. Even if you’ve already filed your tax forms for 2020, that doesn’t mean you can’t claim these funds. You have up to three years to claim the credit, but we recommend that you start talking to an accountant about these funds sooner rather than later.
Why should you go ahead and start discussing your options with an accountant? An effective firm won’t just fill out your forms and go about their business; they’ll talk to you about your options and how you can get the most out of this funding. For example, here at Jitasa, we recommend:
- Dispersing your PPP loans throughout the year if possible. Nonprofits that claim the PPP loans are often tempted to use the entire amount at once to pay their employees. However, this could prevent you from paying employees the necessary $10,000 per quarter in out-of-pocket wages to claim your full ERTC funding. When you plan on dispersing your funding throughout the year, you can gain more long-term value by paying the necessary $10,000 out of pocket in wages each quarter that will allow you to claim the maximum 70% of ERTC funds during 2021.
- Retroactively claiming the tax credit. If you disperse the PPP loans throughout the year, it works to your advantage to retroactively apply for ERTC funds. You’ll be able to more easily show how you’ve spent funding per quarter to receive as much assistance as possible.
Talk to your accountant about the options available to your organization and the steps that you can take to maximize your funding from this legislation.
Then, when it’s time to claim your tax credit, your accountant will be able to help file your organization’s Form 941 with the IRS. This is the form that allows you to claim your ERTC funding.
The federal government passed legislation to help your organization throughout these challenging times. The pandemic lasted longer than almost anyone could’ve predicted, so it will understandably take some time to recover as well.
Be sure you’re making the most of the funding provided by the federal government, including the employee retention tax credit if you’re eligible. Talk to an accountant today to discuss your various options to maximize your financial situation in 2021 and moving forward. With a solid plan in place, you’ll be able to effectively recover from the hardships of the pandemic.
If you’re interested in learning more about the legislation designed to help organizations during the COVID-19 pandemic, check out these additional resources:
- The American Rescue Plan: The Nonprofit Complete Guide. Learn more about the latest of the legislative changes made in response to the pandemic and how it impacts nonprofits.
- Jitasa Bookkeeping and Accounting Services. Discuss your options regarding government funding with a professional by reaching out to a trained Jitasa accountant.