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How Not-for-Profits Should Account for Employee Retention Credits (ERC)

Overview

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 The ERC was originally enacted with the CARES Act in March 2020 and was extended and expanded with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was passed in December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 December 31, 2021. The suspension of operations or a significant decline in gross receipts will determine eligibility, while amounts paid to employees during specific calendar quarters will determine credit amount.

For more specific information on the ERC, qualifications, and how to claim the credit, please see an in-depth overview here.

Accounting Considerations

Organizations with the opportunity to utilize the ERC must also understand the accounting and financial reporting implications. Within generally accepted accounting principles (GAAP), Accounting Standards Codification (ASC) 958-605 discusses accounting for contributions for NFP entities, including government grants.

Under this standard, contributions are “recognized when the condition or conditions on which they depend are substantially met” (ASC 958-605-25). Conditions for the ERC include, but are not limited to:

  • An entity incurs payroll costs in 2020 and 2021 to retain employees.
  • An entity is adversely affected by the COVID-19 pandemic (either by a period of full or partial shutdown as a result of government order, or by reduced gross receipts in 2020 or 2021 compared with the same quarters in 2019). Note that reduction requirements are different for 2020 quarters (50% or more reduction) and 2021 quarters (20% or more reduction).
  • An entity has not used qualifying payroll amounts for both the Paycheck Protection Program (PPP) and the ERC.

Organizations can recognize ERC income in the period they determine the conditions have been substantially met, which generally requires determining whether the process for filing the credit is more than or only an administrative barrier to receiving the credits. Once an organization determines all conditions have been substantially met, it can recognize the ERC as income in that period.

NFP organizations should follow the presentation and disclosure requirements under ASC 958-605, which generally discourages netting income and expenses. ERC income should be recorded on a gross basis as grant income, with related payroll expenses also presented. Adequate disclosure should be made about the amount and nature of the credits (grant income) received.

ERCs have the potential to provide significant, much-needed relief to your organization. It is imperative that 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.

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