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ERC for Tax-Exempt Orgs: A Miniseries – Part I
By Kelsey Vatsaas and Laura J. Kenney
ERC: The latest and greatest
In this first episode of our miniseries on employee retention credits (ERCs) for nonprofits, instead of starting at the very beginning on the topic, we wanted to highlight recent tax guidance – which has a pleasantly surprising twist!
Paycheck Protection Program (PPP) forgiveness in gross receipts – to count or not to count?
Spoiler alert – NOT TO COUNT! A key option to qualify for ERC is showing a decline in gross receipts for a calendar quarter of 2020 or 2021 compared to the same quarter in 2019, pre-pandemic. For tax-exempt organizations, many questions arise about what and how to count gross receipts. Ultimately, nonprofits are required to calculate gross receipts for ERC purposes the same as what’s reportable on Form 990, as defined by §6033 of the Internal Revenue Code.
As we all know, quarterly nonprofit revenues may be a bit unpredictable due to recording of pledges and multi-year grants, and sales of investments, etc. (And though it’s not intuitive, nonprofit gross receipts include gross proceeds from sales of assets – rather than net gains from sales … but that’s just a preview of an episode coming soon in this ERC nonprofit miniseries …)
Getting back to our story, PPP forgiveness is clearly includible in gross receipts for 990 reporting, either as debt forgiveness or as a government grant. Thus, it would be includible in gross receipts for ERC purposes, too, if not for the safe harbor the IRS provided recently. Revenue Procedure 2021-33 issued on August 10th last month allows organizations – solely for ERC purposes – to make an election to back out Paycheck Protection Program forgiveness, (as well as Shuttered Venue Operator Grants, and Restaurant Revitalization Grants, the two “ERC-Coordinated Grants”), from their total receipts.
THIS IS REALLY GREAT NEWS!
Many clients of ours would not have met the 20% drop in gross receipts in early 2021, for example, if they include their PPP forgiveness from round 1 – but WILL exceed the 20% drop without the PPP, making them eligible for not one, but two quarters of ERC!
Timing, Form 990 and Form 990-T
The other recent guidance is IRS Notice 2021-49, released earlier in August on the 4th. Frankly, it didn’t answer many questions, particularly for nonprofits as many of the topics it covered were focused on ownership structures and other matters affecting businesses.
The guidance says that businesses must reduce the tax deduction for qualified wages, (including qualified health plan expenses), by the amount of the ERC taken on those expenses. Nonprofits filing Form 990-T for unrelated business income (UBI) also should take heed of this requirement, of course, because Form 990-T is an income tax return.
The IRS Notice addressed the frequently asked question about the “Timing of Qualified Wages Deduction Disallowance.” For example, an employer, including a nonprofit, that takes the ERC because of the retroactive opportunity relating to eligibility of PPP borrowers to also claim the ERC, or that otherwise files an adjusted employment tax return to claim the ERC, may have already filed its income tax return. So, because of the tracing requirement, it would need to file an amended federal income tax return for the tax year in which the qualified wages were paid or incurred to reduce any overstated deduction taken for those same wages on the original tax return.
To avoid the amended return requirement, many businesses are hurrying to get their 2020 ERCs calculated before the upcoming tax deadlines. Nonprofits eligible for ERC and expecting to deduct qualifying wages on their 2020 Forms 990-T not yet filed have a window of opportunity to do the same!
Some nonprofits were concerned this timing rule would mean they also would have to amend their filed Forms 990 to reduce the qualifying wages reported if they receive ERCs. The tracing rule and amended return requirement are specifically for income tax returns. As with everything ERC, the IRS could always clarify later, but this should not apply to Form 990 which is technically not an income tax return but rather is an information return. More good news!
Well, that’s it for the latest and greatest! Check out all the recent guidance issued by the IRS here https://www.irs.gov/newsroom/treasury-irs-provide-gross-receipts-safe-harbor-for-employers-claiming-the-employee-retention-credit if you are looking for some fascinating reading.
Stay tuned for our next installment in this miniseries where we bring it back to the basics of 2020 and 2021 employee retention credits.