Not-for-Profit Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting not-for-profit organizations.

Update for Nonprofits on the American Rescue Plan Act’s Employee Retention Credit

The American Rescue Plan Act (the Act) was signed in March and expanded the eligibility for the Employee Retention Credit (ERC), as well as extending the credit period through the end of 2021. While the 2020 credit was limited to 50% of $10,000 in qualified wages per employee, the Act increased this amount to 70% of qualified wages paid per employee per quarter. That’s a potential credit of $28,000 per employee for 2021!

For 2021, your exempt organization may be eligible if you experienced either a full or partial shutdown. Untitled design - 2021-07-13T135030.420This could have been due to a government order which limited commerce, travel or meetings due to COVID or if you have a more than 20% quarterly decline in gross receipts as defined under section 6033 of the Code.

While the credit can be used to reduce the employment taxes you need to pay, if you have fewer than 500 employees you can request an advance payment of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. Be careful, though, as the IRS released some errors to be aware of when completing the Form 7200 including:

  • Missing or inaccurate employer identification number
  • Employment tax return type
  • Verifying the math is accurate
  • Signing the form
  • Fax submission only (mailed forms will not be processed!)

In addition to receiving the credit, make sure that you are also considering how to report the credit on your financial statements. While the IRS has issued guidance that the forgiveness of Paycheck Protection Program (PPP) loans should be shown as government grants on your Form 990, no such guidance has been issued yet regarding the ERC. Additionally, there has been no official authoritative guidance issued under U.S. Generally Accepted Accounting Principles on appropriate accounting. However, it has been widely accepted within the industry that the credit should be accounted for as grant revenue under ASC 958-605 and disclosed appropriately.

Clearly, the rules have changed quite a bit from 2020 to 2021. Whether your organization claims the ERC against your employment taxes or files Form 7200 to receive an advance of the ERC, there is a lot to take into consideration. Working with a reputable payroll expert or accounting firm will help an organization prove eligibility and claim the maximum ERC allowable.

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