Do Nonprofits Qualify for ERC?: How to Tell if Your Nonprofit is

Tax breaks can help a struggling business in difficult or unprecedented times. Employee Retention Credit (ERC) is an example of this. It helps struggling businesses trying to stay afloat despite the chaos and aftereffects of the recent Covid pandemic. So, do nonprofits qualify for erc? As a nonprofit, you'll be pleased to know, it's not just there to help for-profit businesses. Nonprofits are eligible  for employee retention credits too.

For example, if you kept your staff employed during the pandemic, but this led to your organization going through a rough patch and experiencing a significant drop in cash flow during certain financial quarters, you could qualify.

In short, the ERC provision in the CARES Act is designed to rescue businesses, including nonprofits, from the economic struggles caused by the global pandemic. This tax credit provides a crucial lifeline for many business owners. This ensures they can continue to operate. In the case of nonprofits, this benefits a wider community than just the organization and its staff.

In this article, we look at ERC in relation to nonprofit businesses, from filling out the forms to getting advice from the experts. Securing this financial help can be a game-changer for struggling nonprofit businesses.

Checking if your nonprofit can qualify

The ERC eligibility criteria for nonprofits include two main factors. These are operational status and gross receipts. Nonprofits need to assess their operational status during the designated financial quarters and establish if Covid impacted them. This includes either causing them to shut down completely or work in a limited capacity during this time.

Firstly, for nonprofits to be eligible, they should be clear about whether they faced a government-imposed mandate that fully or partially suspended their operations. This could involve temporary closures, restrictions, or any other governmental order that affected the organization's ability to carry out its usual activities. The duration and extent of this suspension should be documented because it directly influences whether they qualify for ERC.

Secondly, businesses must look at their gross receipts. Having endured a significant decline in gross receipts during the allotted financial quarters is a key criterion. Comparing specific quarters in the current tax year with the corresponding quarters in the prior tax year will help spot large drops in finances, in addition to acting as proof of this decline. The CARES Act defines a drop of 50% as a significant decline.

This decline is measured until the gross receipts recover to at least 80% of the gross receipts for the same quarter in the prior year. When tracking their financial data, nonprofits are required to consider all sources of income, including donations and grants. A thorough assessment makes sure that any qualification is accurate and maximizes the potential tax benefits for nonprofits.

You should set aside some time to do this, where you won’t be interrupted. To be eligible for ERC, the criteria requires a careful examination of financial records and a clear understanding of the unrelated ebbs and flows in finances at certain times of the year. It may be beneficial to seek help from expert advisory services and use technology solutions to streamline this process.

Understanding the process of claiming ERC for eligible organizations

It’s essential for eligible nonprofit businesses to have somebody who understands the process of claiming the ERC. This person is required to complete and submit Form 941-X, on behalf of the organization. This is the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund. Nonprofits use the form to report adjustments to their previously filed Form 941, reflecting the qualified wages and associated tax credits.

Calculating qualified wages is a complex task requiring accuracy and a careful examination of the money paid to employees. The ERC looks at the size of the nonprofit to work out the correct wage limits. Qualified wages are those paid to employees when operations are fully or partially shut down or when there's a big drop in money coming in. It's important to know the wage limits for both small and big nonprofits, so you can calculate the credit correctly. This way, you make sure you get the right amount of credit, based on your organization's size.

Meeting filing deadlines is another important factor in securing ERC benefits. Nonprofits should adhere to the quarterly deadlines for Form 941-X, ensuring they don’t miss the deadline for submission to the Internal Revenue Service (IRS). Missing a deadline means delays, or not getting the credit. However, if your nonprofit is struggling to meet these deadlines, you may qualify for relief options or extensions.

By having someone else view your forms and calculations, etc, you can avoid common mistakes. Errors in calculating qualified wages, inaccuracies in reporting, or incomplete documentation can lead to complications later on. Nonprofits should use services from those with experience in these areas to help with ERC tax claims. This reduces the risk of errors and increases the chance of the organization benefiting from the help it is entitled to. Things can change. Staying informed about the latest IRS guidelines and seeking professional assistance improves the accuracy and efficiency of the claim process.

Gross receipts measurement and number of employees

When applying for ERC, particularly as a nonprofit, it’s important to understand gross receipts measurement and the number of employees. When your organization assesses gross receipts, the results should include all revenue sources, such as donations, grants, and other forms of income. The process of calculating finances will include comparing specific quarters in the current tax year with the same quarters in the previous year. This can help to determine if there was a substantial decline. You may also consider any other reasons for the decline. Ensure that the drop is related to the effects of the pandemic, and there's a 50% or more in your nonprofit's ion in gross receipts during any calendar quarter compared to the same quarter in the prior year. This may be because your organization couldn't safely meet consumer needs, so couldn't provide its usual products and services.

Full or partial closure or a reduction in business operations plays a crucial role in entitlement to ERTC. Nonprofits should familiarize themselves with the specifics of government orders or restrictions that led to a temporary halt or limitation of their usual operations. For example, many events were canceled. So if the nonprofit relied on these to bring in much-needed funding, it meant they couldn’t operate in the usual way.

The employee headcount is just as significant. It helps to establish the size of the ERC. Nonprofits should assess their average number of full-time employees during 2019, establishing whether they meet the threshold for a small or large organization. As a rough guideline, a small organization is often defined as having 500 or fewer employees, and this may include part-time employees in this calculation. Large organizations are often those with more than 500 employees. However, it’s worth checking before you apply for ERC. These figures can change, and different government bodies and guidelines will have varied definitions.

Paying close attention to the details will ensure accuracy and secure the tax credits that help your nonprofit overcome the challenges posed by the previous and ongoing financial impacts of the pandemic.

Key considerations and documentation for nonprofit ERC claims

When making a claim for ERC, nonprofits must be aware of and follow key considerations around documentation. Most nonprofits will keep records anyway. This thorough record-keeping will help make a successful ERC claim. Organizations that store safe but easy-to-find documents of their gross receipts will notice any significant decline by being able to quickly access these.

We’ve already touched on this, but professional assistance and expertise play a vital part in making a successful ERC claim. This means consulting with tax advisors or experts who are well-versed in nonprofit regulations. The guidance they offer ensures adherence to IRS guidelines. Wage calculations, the cost of pausing or suspending business activities, and headcount measurements require a keen eye. For larger organizations, it can be easy to miscalculate or overlook important details. A fresh pair of eyes, especially when these are attached to an expert, can be helpful in avoiding errors and maximizing potential credits.

IRS notices provide specific examples and guidance that can impact the outcome of nonprofits making ERC claims. For example, IRS Notice 2021-20 clarifies the eligibility of certain wages and how they relate to governmental orders. Using these services and having an expert advise you on how they apply to your claim can avoid wasting time. Expert help also helps you to spot any discrepancies that could delay your claim.

One example of how expert help is beneficial is if a nonprofit faced partial suspension due to local government restrictions affecting their fundraising events. Documentation would include evidence of these restrictions, detailing the impact on operations, and the resulting decline in gross receipts. Expert assistance would guide the organization to accurately calculate qualified wages.

As a nonprofit, local experts may be willing to offer their services at no cost, or at a lower rate than they usually charge. It’s worth asking if they can help.

The impact PPP loans can have on eligibility for nonprofit organizations

Understanding Paycheck Protection Program (PPP) loans and ERC eligibility is crucial for nonprofits seeking financial relief. Previously, organizations were prevented from claiming ERC if they received a PPP loan. However, the Consolidated Appropriations Act of 2021 and subsequent legislation changed this.

This amendment means that nonprofits can retroactively claim ERC even if they previously received PPP funding. The change in legislation allows organizations to access both sources of financial support. However, business owners should ensure that the same wages aren't used for both the PPP loan forgiveness and ERC.

One important thing to be aware of is that the amendment is not just about the past. Nonprofits can strategize for the present and future, and make informed decisions about benefitting from both programs. The flexibility from this addresses the changing challenges presented by the pandemic and allows organizations to adapt their financial strategies accordingly. It can seem like things are getting back to normal for more organizations and individuals, but some people are still impacted. For example, older people and those with poor health may have supported nonprofits and their mission. Some still have to isolate, or are less willing to attend large gatherings. This reduces the money the organization brings in.

Nonprofits need to stay informed about legislative changes, as this can increase or decrease the help they can apply for. The newfound flexibility in claiming ERC alongside PPP shows the government's recognition of the changing needs of nonprofits in helping the community during these unprecedented times. By keeping track of the changes, nonprofits can access all the available help, and stay financially strong and sustainable in today's tough times.

Conclusion: Maximizing ERC Benefits for Nonprofits

For nonprofit businesses to successfully claim ERC, they need to follow steps such as assessing operational status, measuring gross receipts, and understanding the impact of COVID-19 on their organization's operations. Thorough documentation acts as proof that government-imposed mandates resulted in a loss.

Other key considerations during the application process include using information from comprehensive records and referring to up-to-date IRS notices for guidance. It’s also important to use professionals. Their expertise lowers the risk of errors and increases the chances of a successful claim for qualifying organizations.

FAQs

Is there a deadline for nonprofits to apply for ERC, and what can happen if they miss it?

Yes, nonprofits should meet the quarterly deadlines for Form 941-X submissions. Missing deadlines may result in delays or denial of ERC benefits. However, if struggling with deadlines, nonprofits may be able to request extensions to ensure they don't lose out on financial support.

What happens if a nonprofit finds an error in its ERC claim after submission?

If mistakes are discovered after submission, nonprofit businesses should correct them as soon as possible. Consulting with professionals will help with this process. Quick corrections ensure accurate claims and prevent potential problems, such as being awarded too much or too little.

Can a nonprofit apply for ERC if its operations were only partially suspended during the pandemic?

Yes, a nonprofit can still qualify for ERC if it experienced a partial reduction in operations due to COVID-19. Documenting the details of this partial suspension, such as reduced capacity or restricted activities, will show their eligibility for this tax credit.