Dear nonprofit person, we’re sorry but we have to talk about taxes. Fortunately, this post is about a tax credit, not a bill. Our colleagues at MAX ERTC brought a relatively new tax credit to our attention because it offers significant support to the nonprofit sector. It’s the Employee Retention Tax Credit. If your nonprofit qualifies for this tax credit, and it well might, you could be eligible for a sizeable refund. Repeat – a refund. Not a loan!
In March of 2020, The U.S. Congress designed one of the largest American tax credits ever, the Employee Retention Tax Credit. The Employee Retention Tax Credit (ERTC) is a fully refundable tax credit for U.S. employers. It was created alongside the Paycheck Protection Program (PPP) in The U.S. CARES ACT as an economic stimulus to reward employers, including nonprofit organizations, for keeping Americans employed during the Covid-19 pandemic. The credit is available to all eligible employers of any size that paid qualified wages to their employees.You might think of it as another PPP loan.
This time around, though, the ERTC program has often been overlooked by many organizations. While the PPP loan programs of 2020 and 2021 were announced and marketed aggressively, the ERTC program has not enjoyed the same level of visibility. Which is a shame. This program offers substantive benefits to nonprofits who qualify.
When The CARES Act was originally written, organizations were required to choose between the PPP and the ERTC as alternative methods to stimulate their organizations financially. It wasn’t until the passing of The Consolidated Appropriations Act (CAA) in December of 2020 that organizations had the opportunity to receive both PPP and ERTC. The CAA also expanded the ERTC over 4 times in size allowing organizations that qualify to receive up to $26,000 per employee. Many believe that when the program is over the ERTC will be equal to or even greater in size than the PPP program.
If the PPP loan helped your nonprofit weather the most stormy of the pandemic during 2020 and 2021, you should ask about the Employee Retention Tax Credit now. It could offer financial benefits to you. There are still federal funds that might be available to your organization.
How do you qualify?
Eligible Employers for the purposes of the Employee Retention Credit are employers (including nonprofits) that carried on a trade or business during the calendar years 2020 or 2021, and met one or more of these criteria:
- Fully or partially suspended operation during any calendar quarter in 2020 or 2021 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experienced a significant decline in gross receipts during the calendar quarter.
- Started after Feb. 15, 2020
What constitutes a significant decline in gross receipts?
You brought in more than 50 percent less during a given 2020 calendar quarter, than you did during the same calendar quarter in 2019.
Your income declined more than 20 percent during the first three calendar quarters of 2021, compared to your income in the same period back in 2019.
Are Nonprofit organizations eligible for the ERTC?
Yes. for purposes of the ERTC, a non-governmental tax-exempt organization described in section 501(c) of the Internal Revenue Code that is exempt from tax under section 501(a) of the Code is deemed to be engaged in a “trade or business” with respect to all operations of the organization.
How much can we claim?
This is where things get a bit complicated, because the claim levels differ by year.
The 2021 COVID-19 employee retention credit is equal to 70% of qualified wages. The maximum amount of qualified wages for any one employee per quarter is limited to $10,000 (including qualified health plan expenses), with a maximum credit for a quarter with respect to any employee of $7,000, for a total credit of $21,000 per employee for calendar year 2021.
The 2020 COVID-19 employee retention credit is equal to 50% of qualified wages. The maximum amount of qualified wages for any one employee per year is limited to $10,000 (including qualified health plan expenses), with a maximum credit for the year with respect to any employee of $5,000 (for a total credit of $5,000 per employee for calendar year 2020).
What makes this tax credit so appealing to nonprofits is that you can still file for the credits retroactively, even if your financial picture has improved since the end of 2021. If you qualify, you’ll receive a refund check from the IRS.
Filing for the ERTC
To get your PPP loans, you went to your bank or other lender; these were the ones that helped recipients process their claims, making this federal tax benefit easy to manage.
The ERTC program does not work through banks. It requires that you amend the IRS quarterly 941 reports for the periods in question, and that means you’ll need to consult with a CPA or financial consulting firm.
However, only a minority of accountants and bookkeepers have taken the time and energy necessary to learn the ins and outs of the IRS ERTC guidelines. Many have shied away due to the short term nature of the program and its complexities. It’s best for you to find consulting firms that specialize in the ERTC and can help your nonprofit maximize these refunds.
ERTC is NOT a loan.
Unlike the PPP loan, the ERTC is a fully refundable tax credit. It comes to you in a refund check from the IRS, as long as you qualify. If you can gather your nonprofit’s quarterly gross revenues for 2019, 2020, and 2021, your chosen consultant can submit the credit promptly.
Please take the time today to check to see if your organization has determined if they qualify. If you haven’t so, don’t waste any more time. Do not put this off. Your organization could be eligible for a meaningful size ERTC.