The COVID-19 pandemic created unprecedented challenges for nonprofit organizations across the United States. Many faced difficult decisions about maintaining their workforce while dealing with reduced funding and operational restrictions. As a Chicago-based CPA firm serving clients nationwide, SSL Associates understands the unique challenges nonprofits face in navigating complex tax credits and financial opportunities, especially in the wake of the pandemic.
A crucial lifeline that many nonprofit organizations may have overlooked is the Employee Retention Credit (ERC), which is a refundable tax credit designed to help employers maintain their workforce during the pandemic. While many tax-exempt organizations initially assumed they wouldn't qualify, this valuable program is indeed available to nonprofits. It can even potentially provide significant financial relief. Let’s explore this topic so you can determine if your nonprofit qualifies.
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Do Nonprofits Qualify for ERC?
Yes, nonprofit organizations can qualify for the Employee Retention Tax Credit if they meet specific criteria. To be eligible, your nonprofit must satisfy either the Gross Receipts Test or the Government Orders Test — you only need to meet one of these conditions, not both.
Additionally, you must have at least one full-time W-2 employee and have maintained qualifying wages during the relevant periods.
Examples of eligible nonprofits include museums, private schools, hospitals, credit unions, libraries, and churches.
Gross Receipts Test: Meeting the Revenue Reduction Requirement
Under this test, your nonprofit must have experienced a significant decline in gross receipts during the qualifying quarters. For 2020, this means a 50% reduction compared to the same quarter in 2019. For 2021, the threshold was lowered to a 20% reduction to make it easier to qualify.
For nonprofit organizations, gross receipts include:
- Contributions and grants
- Program service revenue
- Membership dues
- Investment income
- Revenue from special events
- Sales of assets
- Other income sources
Government Orders Test: Demonstrating Impact from Government Restrictions
Your organization might qualify if a government authority required you to fully or partially suspend operations due to COVID-19 restrictions.
This includes limitations on:
- Group gatherings affecting your programs
- Facility capacity restrictions
- Reduced operating hours
- Travel restrictions that impact your services
Steps to Secure Your Nonprofit Organization's ERC Refund
If you’re not sure how to get the refund, we’ve made it simple for you. The filing process for claiming your Employee Retention Credit involves several steps:
- Determine your eligibility periods based on either test.
- Calculate your qualified wages for each qualifying quarter.
- File Form 941-X to amend previously filed employment tax returns.
- Submit supporting documentation of your eligibility.
Claims for 2020 had to be filed by April 15, 2024. For 2021 claims, you must file by April 15, 2025.
Breaking Down Your ERC Calculation
The credit amount varies between 2020 and 2021.
2020:
- 50% of qualified wages paid per employee
- Maximum credit of $5,000 per employee annually
- Includes health plan expenses
2021:
- 70% of qualified wages paid per employee
- Maximum credit of $7,000 per employee per quarter
- Available through September 30, 2021
For example, consider a nonprofit community center with 15 employees that experienced a 55% decline in gross receipts during the fourth quarter of 2020 compared to the same period in 2019. If they paid each employee $10,000 in qualified wages during that quarter, they could potentially claim a credit of $5,000 per employee (50% of wages up to the maximum). This results in a total credit of $75,000 for that period.
Reporting ERC: Things to Consider
When a nonprofit organization is claiming the Employee Retention Credit, they must navigate several unique considerations that differ from for-profit businesses:
Wage Allocation Restrictions
The qualified wages you use for your ERC claim in 2021 cannot be applied to other federal tax benefits. This includes various credits such as the Research & Development Credit, family and medical leave credits under Code Section 45S, family leave credit under Code Section 3132, and sick leave credit under Code Section 3131.
Another important note is that these same wages cannot be used for specialized credits like the military differential wage payment credit, Indian employment credit, or empowerment zone credit. Similarly, if your organization received a shuttered venues grant or restaurant revitalization grant, be sure to carefully track wage allocations to avoid overlap.
Paycheck Protection Program (PPP)
The Consolidated Appropriations Act 2021 made it possible to claim both PPP loans and the ERC. However, there are some considerations to keep in mind:
- You cannot use the same wages for both programs.
- Careful documentation is required to prevent double-counting.
- Strategic allocation between programs can maximize benefits.
- PPP loan forgiveness does not disqualify you from ERC.
Financial Statement Guidance for Nonprofit ERC Recipients
Proper financial reporting of your ERC claim is crucial. Here’s what our team at SSL Associates recommends:
Statement of Financial Position
Proper handling of the Employee Retention Credit on your Statement of Financial Position requires careful attention to several key elements. You'll need to record any qualified amounts as a current receivable on your books, even if you haven't received the funds yet. Any advances your organization receives should be classified as current liabilities.
To maintain transparency in your financial reporting, these ERC-related items should be presented separately from other financial elements, making it clear to readers exactly how the credit impacts your organization's financial position.
Statement of Activities
Your Statement of Activities requires specific treatment of ERC-related items to ensure proper financial presentation. All ERC amounts should be reported at their gross amounts rather than being netted against expenses. These amounts need to be incorporated appropriately into your functional expense categories. When the amounts are significant, they warrant separate disclosure to provide readers with a clear understanding of how the credit affects your organization's activities and operations.
Notes to Financial Statements
The Notes to Financial Statements section requires comprehensive coverage of your organization's participation in the ERC program. Include a thorough description of the program itself and explain how your organization met the eligibility criteria. Provide detailed information about all amounts you've claimed and received through the program.
Be sure to explain any contingencies or restrictions associated with the credit, and document all compliance requirements that apply to your organization. This thorough documentation helps ensure transparency and demonstrates your adherence to proper financial reporting standards.
Your Nonprofit's ERC Opportunity Awaits
From eligibility assessment to maximum benefit calculation, SSL Associates provides comprehensive support tailored to nonprofit organizations.
Maximize Your Nonprofit's ERC Benefit with SSL Associates
If you’re a nonprofit organization that wants to take advantage of an ERC benefit, you don’t have to go through this process alone. SSL Associates offers comprehensive Employee Retention Credit assistance for nonprofits in Chicagoland and across the U.S. Our dedicated team can help evaluate your eligibility, calculate maximum credit potential, prepare required documentation, and more. Our proven experience combined with our personalized and hands-on approach make us your trusted CPA firm for your nonprofit.
Get in touch with us today to explore your potential ERC claim. Let us help you secure the credit your organization deserves while ensuring full compliance with all requirements.
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