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Nonprofit Organizations and the New/Updated Employee Retention Credit

2/25/21 – Bryan Pautsch

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The Consolidated Appropriations Act (CAA), passed at the end of December 2020, made substantial changes to the Employee Retention Credit.  The most significant change is that PPP borrowers can now claim the credit, subject to certain eligibility requirements and with the understanding that wages funded by forgiven PPP loan proceeds cannot be used to calculate the credit. 

When the CARES Act was passed, a nonprofit organization that received a Paycheck Protection Program (PPP) loan was ineligible to claim the employee retention credit.  The CAA repealed this requirement retroactive to the date of the CARES Act enactment.  A nonprofit organization that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit.

In addition, the credit was originally set to expire on December 31, 2020.  The credit has been extended and expanded for the first two quarters in 2021.  Nonprofit organizations should review their situation to determine if the credit is available.  Below is a summary of a few key requirements of the Employee Retention Credit.  Additional guidance from the IRS is expected.  

 

CARES Act

Consolidated Appropriations Act, 2021

Time Period Credit is Available

Qualified wages paid between March 13, 2020, and December 31, 2020.

Qualified wages paid after March 12, 2020, and through June 30, 2021 (now available in the first two quarters of 2021).

Eligibility Requirements

Businesses with operations that were either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or

Gross receipts were less than 50% of gross receipts for the same quarter in 2019 until such quarter as gross receipts are 80% of same quarter in 2019.

Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit.

Beginning January 1, 2021, the credit will be available to businesses with operations that are either fully or partially suspended by a COVID-19 governmental order and only during the period the order is in force; or

Gross receipts are less than 80% of gross receipts for the same quarter in 2019.

Businesses that were not in existence in 2019 may use a comparison to 2020 for purposes of the credit.

Percentage of Wages

The credit was 50% of the qualified wages.

Beginning January 1, 2021, the credit is 70% of qualified wages.

Maximum Credit Amount

Annual cap of $5,000 per employee ($10,000 in qualified wages x 50%).

Beginning January 1, 2021, the cap is increased to $7,000 per employee for each of the first two quarters of 2021 ($10,000 in qualified wages x 70%) for a possible $14,000 credit per employee.

The 2021 credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.

Employer Size for Whether an Employee is Working or Not:

A company with more than 100 employees could not take the credit for wages paid to an employee performing services for the employer.

A company with 100 or fewer employees was eligible for the credit, even if the employee was working.

Beginning January 1, 2021, the threshold increases to 500.

An employer with 500 or fewer employees will be eligible for the credit, even if employees are working.

Note that in calculating the 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated.

Governmental  Entities

The employee retention credit was not available to any federal, state, or local governments, or any agency or instrumentality thereof.

Effective January 1, 2021, the following governmental entities are eligible for the credit:

  • Public colleges or universities
  • Organizations whose principal purpose is providing medical or hospital care
  • Certain Federal instrumentalities, such as federal credit unions

Definition of Gross Receipts for Tax Exempt Entities

Gross Receipts were not defined specifically for non-profit entities

As reference by Section 6033 of the Internal Revenue Code, gross receipts include the following: contributions, gifts, grants, dues or assessments, sales or receipts from unrelated business activities, sale of assets, and investment income (e.g., interest, dividends, rents, and royalties).

Gross receipts are not reduced for any associated costs or expenses.

PPP loan forgiveness is not included in Gross Receipts


VonLehman has established a preliminary analysis to determine if this credit would be beneficial to you.  If you have any questions, please contact VonLehman’s nonprofit tax expert, Bryan Pautsch, at bpautsch@vlcpa.com or 859-331-3300.