The Employee Retention Credit (ERC) is a refundable payroll tax credit your not-for-profit (NFP) organization may be eligible to claim. The ERC was originally enacted with the CARES Act in March of 2020 and was extended and expanded with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which passed in December 2020. An additional extension of the credit was granted through the signing of The American Rescue Plan Act of 2021 on March 11, 2021.
The ERC is a fully refundable credit for qualified wages paid after March 13, 2020, until September 30, 2021. Having operations suspended or experiencing a significant decline in gross receipts will determine eligibility, while amounts paid to employees during specific calendar quarters will determine the credit amount.
For specific information we’ve shared on an ERC overview, qualifications, and how to claim the credit, please review our thought leadership content published on March 16, 2021.
Determining Gross Receipts for NFP Organizations
For employers that are analyzing whether they have had a significant decline in gross receipts for purposes of the ERC rules, the determination of which amounts are included as gross receipts is critical. This is particularly true for tax-exempt entities because they are subject to specific rules as to how they determine their gross receipts.
Gross receipts include amounts received as contributions, gifts, grants, and similar amounts, without a reduction for the expenses of raising and collecting those amounts. It also includes amounts received as dues or assessments from members or affiliated organizations, gross sales or receipts from business activities (including unrelated business activities), as well as the gross amounts received as investment income such as interest, dividends, rents and royalties. Notably, for tax-exempt entities, gross receipts also include the gross proceeds received from the sale of assets, without reduction for the cost or other basis and expenses of that sale. This means if your organization sold assets such as securities during a quarter, the gross receipts include the proceeds of that sale and not the net realized gain or loss. It is important to specify here that unrealized gains and losses are excluded from this calculation as they are not specifically defined as gross receipts.
For example, if the organization had a stock in its portfolio that it purchased for $15,000 a few years ago and sold in the current quarter for $20,000, the financial statements of the organization likely reflect a $5,000 gain from the sale of that stock. However, for purposes of determining gross receipts for the ERC, the organization must include the $20,000 of proceeds that it receives and not the $5,000 gain. These rules apply to all quarters used in the organization’s analysis, whether a quarter in 2019 used for comparison or the current quarter for which they are trying to qualify for an ERC.
ERCs have the potential to provide significant, much-needed relief to your organization. It is imperative organizations understand their eligibility related to ERCs, the financial information that is required of them to apply, and the implications that could occur should they receive funds they do not actually qualify for. If you have any questions or would like additional information, please contact a member of your Blue & Co. service team.