ERC – New Information and Hot Topics for Nonprofits
I’m often asked “I heard the ERC rules changed and now we might be eligible” to which I scratch my head a little. The “rules” for ERC haven’t really changed since November 2021 when the Infrastructure Bill removed eligibility for calendar Q4 2021. The last official IRS guidance was issued shortly before (Revenue Procedure 2021-33) in August 2021, which largely clarified that you could back out PPP, Shuttered Venue, EIDL Advance, and Restaurant Revitalization funds from your gross receipts calculations.
But, alas, the time has come for (a small amount of) additional information to be released. That said, while it has a significant impact in some industries, it isn’t applicable for most nonprofits- and if anything- it may reduce eligibility pathways.
GLAM 7/21/23
On July 21, 2023, the IRS released a Generic Legal Advice Memorandum (GLAM 2023-005) – and come on- I can’t pass up a pause for how great that acronym is. It addresses eligibility under full or partial shut-down, and specifically how a supply-chain disruption may qualify an organization. The GLAM outlines 5 scenarios in which entities may have been applying the supply chain disruption as basis for eligibility, but most of the scenarios lacked the ability to:
- Show that the supplier’s operations were suspended under an actual government order.
- Show that the lack of supplies from the shut-down vendor caused a more than nominal impact on its own operations.
- Demonstrate that the entity was not able to obtain critical goods or materials from an alternate supplier.
How and where does this matter for nonprofits? The most common example we have seen of organizations using supply-chain disruption is when an organization uses space it does not own or rent (often an in-kind contribution of space) to operate its programming, and the organization was unable to run programs as the entity owning the facility was closed under an order. For example, an after-school program that is run at the school and was unable to operate when the school was closed under government order. In this case, the organization needs to meet the three criteria above to be eligible. This aligns with CLA’s prior interpretation of guidance but may vary from what other providers of ERC services have advised.
Other Nonprofit ERC Trends and Highlights
- Continued increase in “pressure tactic” sales of ERC services, despite IRS messaging and focus to weed out bad actors. Particularly in the nonprofit space, we are seeing a lot of organizations inundated by firms promising broad-reaching eligibility, large $$$, and “proven success” helping organizations like you claim credits. Our suggestions here: do your due diligence, as we shared in a partner post with Propel Nonprofits.
- Increasing IRS audits of ERC: While there is no “Audit Plan” or public report available, our firm has seen an uptick in clients receiving notices of audit from the IRS for their Employee Retention Credits. Thus far, most clients selected had larger total credit amounts ($1M or more) though we don’t know if that is random or intentional. CLA’s national team helping clients with ERC audits will be releasing an article about What to Expect in an IRS audit of ERC. Stay tuned!
- Continued confusion on Gross Receipts: Though we are more than three years into ERC, we continue to see nonprofits incorrectly calculating gross receipts. The top 3 most common issues:
- Investment Proceeds on Sales: If your organization has investments, look twice at your analysis for qualifying drops. Any time an investment is sold it creates a gross receipt- and timing of that can drastically skew eligibility. Check your 990 pg. 9 – line 7a. If you have a number in that box, you have proceeds on sales, and need to dig up those investment statements to see in which quarter(s) they hit.
- Accrual Conversions – If your form 990 is on accrual basis, but you aren’t recording all revenues on full accrual each month/quarter, you may need to adjust the timing in your analysis to truly evaluate eligibility. For example, if you host an event each May and solicit sponsorships for it Jan – March, you may record those sponsorships as revenue as they come in (vs. booking them as deferred). You don’t technically earn the sponsorship revenue until the date of the event, so you should shift those revenues to Q2 for your analysis.
- COVID Relief Funding – Many nonprofits received significant amounts of Covid relief funding in many forms. While for many organizations, it passed through to other entities, the IRS has been very specific about what can be excluded for gross receipts calculations (PPP, Shuttered Venue, EIDL Advance, and Restaurant Revitalization). In all other cases, if the funding was booked as your organization’s revenue (accrual balance, hit your Statement of Activities), it needs to be kept in your gross receipts calculations.
How we can help
CLA has a team of individuals specifically helping nonprofits navigate ERC eligibility, calculations, and preparing the form 941X. Through 2023, our pricing structure is $750/Employee per period of eligibility. We would love the opportunity to help your organization as you evaluate if and how to pursue this credit. Please fill out this brief form to get connected to our team.
If you missed it, check out the recording of our ERC for Nonprofits webinar from June! Transform Your Organization With Insights on Employee Retention Credits : 2023 : Events : CLA (CliftonLarsonAllen) (claconnect.com)
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