ERC Miniseries – Part III – Back to Basics

In the last episode of our ERC for nonprofits miniseries, Kelsey gave us a GREAT chart that helps you see all of the ERC limits and rules at once. If you missed the last episode, you HAVE to go back and see that  – and if you’re binge watching this miniseries – even better!

Here is our “back to basics” episode including some of the questions our clients are asking … but first let us ask you a question –

Did you pay employees between March 13, 2020 and now?

If so, you don’t want to overlook this opportunity. Many organizations qualify for at least some period of time based on either a government shut-down order, significant decline in gross receipts, or both.

Do I still have time to claim the ERC?

Yes, the regular three-year statute of limitations for tax returns applies for payroll tax returns as well. You have three years from the original due date of the Form 941 filing or two years from the date you paid the tax reported, whichever is later, to file a 941-X to claim the credits.  [Check out our next episode to learn all about the 941-X!]

How do we get started?

So how do you get started to see if you can get the credit?

Here are key questions to get started in looking at your situation.

For 2020:

• Did you have fewer than 100 fulltime employees in 2019?
• Did your organization have a greater than 50% reduction in gross receipts in any quarter of 2020 compared to same quarter of 2019?
• Was a portion of your business (maybe a location or a program) fully shut down by a government order since mid-March 2020?
• Were your organization’s operations partially suspended based on a government order since mid-March 2020?

For 2021:

• Did you have fewer than 500 fulltime employees in 2019?
• Did your organization have a greater than 20% reduction in gross receipts in the 4th quarter of 2020 compared to the 4th quarter of 2019?
• Did your organization have a greater than 20% reduction in gross receipts in any quarter of 2021 compared to the same quarter of 2019?
• Was a portion of your business (maybe a location or a program) fully shut down by a government order anytime in 2021?
• Were your organization’s operations partially suspended based on a government order anytime in 2021?

These questions don’t need to all be answered yes, and they are not mutually exclusive.

What does small employer mean?

There is a GREAT benefit to being classified as a “small employer” for ERC purposes – because, if your organization met either the government shut-down or reduction in gross receipts test, it can qualify for the ERC – EVEN IF you paid employees while they were working!

For 2020, to be considered a “small employer” and qualify for the credit on all wages and healthcare benefits paid to all employees in qualified periods, the magic number is 100 employees (from 2019). For 2021 credits, that cap was lifted to 500 employees, making many more organizations eligible!

The IRS uses a definition of fulltime employees which is different than the fulltime equivalents definition for purposes of the Paycheck Protection Program loans, just to make it more interesting.

For ERC, you can determine your number of employees by doing the following:

• Identify the number of fulltime employees listed on your 2019 calendar year ACA report (if required) – and that is your number!

or

• If you don’t have the ACA report, calculate it by:
  • Obtaining employees’ hours by month for calendar 2019
  • Any employee who worked >130 hours in the month = 1.0
  • Any employee who worked <130 hours in the month = 0.0
  • Total per month
  • Average for the 12 months
  • And you have your number!

If you are a large nonprofit who had >100 fulltime employees in 2019 (for the 2020 credit), or >500 fulltime employees in 2019 (for the 2021 credit) you may still be eligible to claim credits, but only for those employees you paid (wages or healthcare) who were NOT working. 

What is a government shut-down?

An order from an appropriate governmental authority, such as from the Federal, State or a local government that limits commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the COVID-19 pandemic and that relates to the suspension of a nonprofit employer’s operations is a government shut-down for ERC purposes.

If a government order causes suppliers of critical goods or materials to a nonprofit organization to suspend its operations, based on the facts and circumstances, this may result in the nonprofit being considered having its operations fully or partially suspended. But if a government order causes the service recipients of a nonprofit organization to stay home or otherwise reduces the demand for the organization’s products or services, that is not considered a suspension of operations due to a governmental order.

What is a partial government shut-down?

If a government order allows a nonprofit to continue its essential business operations, the nonprofit is not considered to have a full or partial government shut-down unless, under the facts and circumstances, there is more than a nominal portion of its business operations that are suspended by a governmental order. Again, the facts and circumstances are important.

For purpose of the ERC, an employer’s business operations are considered to be more than a nominal portion of its business operations if either:

• that portion of the business operations generates at least ten percent of the total gross receipts, (measured by the same period in calendar year 2019), or
• employee hours performed for that portion of the business is at least ten percent of the total number of hours performed by all employees in the employer’s business (again, measured using the same period in calendar 2019 for employee service hours).

What is gross receipts decline?

Qualifying for the ERC under the decline in gross receipts method is the more straightforward path, as it uses full quarters, doesn’t require researching government orders, and may have less ambiguity.  The key point is to ensure correct calculations and to always remember to reference back to the same quarter of 2019 (yes, even in 2021).

A significant reduction in gross receipts is a greater than 50% drop in 2020 compared to 2019; and for 2021, a greater than 20% drop, again, compared to 2019.

How do we calculate gross receipts?

Tax-exempt organizations are directed by the IRS guidance to follow Internal Revenue Code (IRC) section 6033 for the definition of gross receipts, which is effectively the method you use for tax reporting on your Form 990.  For many, but not all, this is on the accrual basis. And the tax reporting usually varies a bit from the audited financial statements under GAAP, so be sure to adjust your figures appropriately.  The most common adjustments organizations need to make include:

• Remove in-kind contributions of service (which includes in-kind space provided to an organization); keep in-kind contributions of assets.
• Remove unrealized gains and losses
• Realized gains and losses are included; but without reduction for basis
• Follow revenue recognition principles for when to recognize multi-year pledges, grants, etc.

The challenging issue for many organizations is that they may not track and report on a full accrual basis throughout the year but will “true up” at year-end.  To do this gross receipts analysis correctly, an organization should do a detailed review of its sources of gross receipts and shift timing into the appropriate quarters to ensure the comparison to 2019 is apples-to-apples and on a true gross receipts basis.

While doing the exercise of comparing 2019 gross receipts to 2020 or to 2021, a tax-exempt organization with significant turnover in its investments (i.e. gross receipts from sales of assets) or a large pledge or outright gift reported in 2019 may be pleasantly surprised!

We have been so excited to tell our tax-exempt clients and friends this past year about how great the Employee Retention Credit is for anyone who qualifies. This is just a wonderful positive step towards recovery and financial health of our nonprofit community. And now with the latest IRS guidance, as reported in our first episode,  https://blogs.claconnect.com/nonprofitinnovation/erc-for-tax-exempt-orgs-a-miniseries-2/ the opportunity has gotten even better!