ERC Miniseries – Episode VI: Recording the Credits

• December 2, 2021
• Laura Kenney

By Kelsey Vatsaas and Laura J. Kenney

Whew – we made it!  We thank you and give you credit if you’ve binge-watched this entire mini-series on the ERC. Hopefully you are intrigued to find some credits (i.e. MONEY) for your organization, and now have the tools to do it!

This last topic is the last step in the process (other than watching the mail for that IRS check in ~6-9 months …)  which is recording the credits.

 Financial Statements:

• How to record it – Should it be recorded as revenue or does the credit reduce a previously recorded expense?  Generally, the credits are considered a form of government assistance and therefore, nonprofit organizations will follow the “conditional contribution” guidance and record them as contribution or government grant revenue.  If the credit amount is significant to the overall financial statements some organizations may choose to report it on a separate line item.
• When to record it – Under the conditional contribution guidance, you record when you have met the conditions, which include knowing you are eligible and the amount. Therefore, we would typically see nonprofits record the revenue and receivable when they file the 941-X with the IRS.

Form 990:

• How to record it – The ERC will be reported on line 1e – Government grants (contributions) on Form 990, Part VIII – Statement of Revenue.
• When to record it – You will generally follow the timing you used for recording on your audited financial statements. The IRS did issue IRS Notice 2021-49 in August 2021, indicating that a taxpayer claiming the 2020 ERC would need to reduce qualified wages deducted on the 2020 tax return by the amount of the credit. This led to a scramble for many for-profits. The language of the guidance, however, specifically stated “tax return” and the Form 990 is not a tax return, but an informational filing. Therefore, at this time based on guidance available, we have interpreted that this guidance only applies to nonprofits claiming the ERC with qualified wages deducted on their Forms 990-T. Generally, this means that the ERC is even more valuable to nonprofits than to for-profit organizations.

Care with record-keeping

Based on a recent IRS speech at a virtual tax conference, we understand the Service is going to be training the trainers in early 2022 so they can audit ERC claims. Therefore, we recommend that if you claimed DIY credits consider having professionals review your files and your tax positions for the ERC.

The IRS has advised on the substantiation requirements and the general records to maintain to support eligibility for the tax credit. Not everything will apply but an eligible employer will adequately substantiate eligibility for the employee retention credit if the employer creates and maintains records that include the following information:

• Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including:

• any governmental order to suspend the employer’s business operations;
  • any records the employer 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 business operations;
  • any records the employer used to determine it had experienced a significant decline in gross receipts;
  • documentation of use of the safe harbor under Revenue Procedure 2021-33 to exclude PPP loan forgiveness and other ERC-Coordinated Grants from gross receipts for purpose of the ERC;
  • any records of which employees received qualified wages and in what amounts;
  • records to document if the employer is not a large employer; and
  • in the case of a large eligible employer, work records and documentation showing that wages were paid for time an employee was not providing services.

• Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
• Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for purposes of the employee retention credit and, if so, how the aggregation affects the determination and allocation of the credit.
• Copies of any completed Forms 7200 that the employer submitted to the IRS.
• Copies of the completed federal employment tax returns that the employer submitted to the IRS (or, for employers that use third-party payers to meet their employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on the federal employment tax return)
• An eligible employer should keep all records of employment taxes for at least 4 years after the date the tax becomes due or is paid, whichever comes later.

These should be maintained and available should the IRS ask to review your ERCs.

The Infrastructure Investment and Jobs Act

The Infrastructure Investment and Jobs Act (the “Act”) signed into law on November 15, 2021 eliminated the ERC for the fourth quarter for most organizations. So, the credit ended as of the third quarter of this year, 2021. But there is still time to apply for the credit for previous eligible quarters, and many nonprofits are doing just that.

The IRS has recently issued Notice 2021-65 providing some penalty relief for taxpayers who received advance payments of the ERC for wages paid in the fourth quarter of 2021 prior to enactment of the Act and for taxpayers that reduced deposits of their employment taxes anticipating ERC for the fourth quarter of 2021. The guidance provides information on correcting these tax underpayments to avoid penalties. If you do receive a penalty notice but don’t qualify for relief under Notice 2021-65, you may reply with a reasonable cause explanation that the IRS will consider.

Well, you made it!  We hope this series helped answer many of your questions about employee retention credits and has equipped you to access these resources for your organization. Thanks for tuning in!

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