Churches and Nonprofits Encouraged to Check Employee Retention Tax Credit Eligibility Now
Are you familiar with the Employee Retention Tax Credit (ERC)? And are you aware that the Internal Revenue Service (IRS) and Treasury Department have released additional guidance on the ERC program, including looming deadlines to file?
Georgia United Methodist Foundation President and CEO Mathew A. Pinson had a conversation with Sean Taylor, CPA and Chief Executive Officer, and Nicole Davis, CPA and Tax Senior Manager, with Smith + Howard Advisory, LLC in Atlanta regarding the ERC program and some of the common misunderstandings associated with the program.
Click here to watch a video of Mathew’s conversation with Sean and Nicole.
The ERC is a broad-based refundable tax credit designed to encourage employers to keep employees on their payroll. The credit is available from the end of Q1 2020 through Q3 2021. For 2020, the credit is 50% of up to $10,000 in eligible wages paid by an employer (max annual credit of $5,000 per employee for 2020) whose business was fully or partially suspended because of COVID-19 government orders or whose gross receipts declined by 50% or more. For 2021, the credit is 70% of eligible wages up to $10,000 per quarter (a maximum of $21,000 per employee for the 2021 year) for businesses whose gross receipts declined by 20% or more on a quarterly basis compared to 2019 or were fully or partially suspended due to COVID-19 government orders. The credit is generally available to all businesses with under 100 employees in 2020 and 500 employees in 2021, including tax-exempt organizations. The only exception is that the ERC does not apply to the government of the United States, the government of any state or political subdivision thereof, or any agency or instrumentality of those governments.
To qualify, the employer must meet one of two alternative tests, which are calculated each calendar quarter. Either:
1. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or
2. The employer’s gross receipts are below 50% of the comparable quarter for 2020 or below 80% for 2021 when compared to 2019 (both years compare to 2019 for ERC purposes). For 2020, businesses can continue taking the credit until the employer’s gross receipts go above 80% of a comparable quarter in 2019. For 2021, businesses can use the prior quarter to qualify, automatically qualifying for two quarters once they hit the 20% decline in either Q1 or Q2 2021.
Here is a list of some background and common misunderstandings:
1. Churches and nonprofits don’t qualify for the ERC at all.
False. A qualifying business is one whose:
a. Operations were fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19.
b. Gross receipts for any quarter in 2020 were less than 50% of its gross receipts for the corresponding quarter in 2019, or gross receipts for any quarter in 2021 were less than 80% of its gross receipts for the corresponding quarter in 2019.
Businesses, including churches and nonprofits, can currently take the credit through September 30, 2021. The credit is claimed by amending 941 filings, which are due within 3 years of the original filing (Q2 2020 amendments are due July 31, 2023).
2. My church or nonprofit is too large to qualify for the ERC.
False. All businesses (including churches and nonprofits) may take the credit – headcount only determines the total wages that qualify. For 2020, if a business had 100 or fewer full-time employees during 2019, all wages paid during an eligible quarter or period are eligible for ERC*. If a business has over 100 employees, wages paid to an employee not to work or work at a reduced capacity (and paid full wages) during an eligible quarter or period are considered qualified wages for ERC. For 2021, this employee headcount limitation increases from 100 to 500. *NOTE: Aggregation rules apply.
3. My church or nonprofit does not qualify if we don’t have a 50% or 20% revenue reduction.
False. A business (including churches and nonprofits) can qualify if its operations were fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19. A 20% revenue reduction is not required under this rule. However, you would have to prove your business was more than nominally affected by the orders to claim the credit.
4. My church or nonprofit definitely will qualify if we had a government order, including social distancing.
False. The IRS has issued many guidelines when it comes to qualifying for the credit under imposed government orders. Suppose your business (including church or nonprofit) operations have been affected by a government order. In that case, you are encouraged to contact your tax advisor to walk through your particular situation to determine eligibility to claim the credit.
5. 2020 has passed, so I can’t take the credit for 2020.
False. The ERC can be taken retroactively for 2020 by amending the corresponding Form 941 for the qualifying quarter.
6. My church or nonprofit received PPP funds, so I am not eligible for ERC.
False. The ERC is allowed in coordination with a PPP loan but can only be claimed on wages not used for PPP forgiveness. Smith + Howard Advisory, LLC generally still sees great credits in periods covered by PPP forgiveness.
The Georgia United Methodist Foundation’s partnership with Smith + Howard Advisory, LLC elevates and advances our purpose and mission, which remains focused on partnering with churches, nonprofits, individuals, and families in direct support of the ministries and mission of the church. In this way, we are a ministry partner as we seek to live out our mission to provide faith-based financial solutions for investing, lending, training, and planned giving.
Please visit smith-howard.com to learn more about Smith + Howard Advisory, LLC. Read Sean Taylor’s bio here or Nicole Davis’s bio here.