Note: This guest post is from financial management consultant Cynthia Moore of Operation Fairy Godmother, cynthia@operationfairygodmother.org. Thanks, Cynthia!

Did your organization take advantage of the PPP, EIDL, Shuttered Venue Operators Grant, or other Federal grant and loan programs? For many nonprofits, this money was a godsend during the depths of the pandemic.

Far fewer groups know about the Employee Retention Tax Credit program. It’s my goal to help nonprofits claim their share before the program expires.

What is the Employee Retention Tax Credit program?

This program – also called the ERC or ERTC – is part of the CARES Act. The purpose is to reimburse (or credit) employers who were financially impacted by the pandemic yet continued to pay employees.

The program allows employers to claim a credit – and be reimbursed for – payroll expenses paid during qualifying time periods.

How to qualify

There are two pathways toward qualification as outlined below.

If your organization meets one of these pathways and continued your payroll, it’s likely that you’ll qualify. Either a significant decline in revenue OR a full or partial shutdown are necessary to qualify.

Pathway 1: Significant decline in revenue

What constitutes a “significant decline?” Compare your revenues to the same quarter in 2019, before the pandemic, using the following guidelines.

Q2-Q4 2020	Q1-Q3 2021
A reduction in revenue of 50% or more compared to the same quarters in 2019	A reduction in revenue of 20% or more compared to the same quarters* in 2019

* Note: The “alternative quarter” provision may allow you to “look back” to the prior quarter.

Pathway 2: The full or partial shutdown test

If your non-profit was fully or partially shut down due to government orders and/or mandates, and you continued to pay employees, you are eligible to apply for ERC for the time you suspended operations – and this resulted in a “more than nominal” reduction of your pre-pandemic revenue stream.

To qualify under the partial shutdown provision, the portion of your operation that was closed must have accounted for at least 10% of your revenue prior to the pandemic. You’ll need to provide an explanation of the shutdown, reference the relevant orders or mandates, and the list the dates your organization was affected.

How much money are we talking about?

The following table shows funding guidelines for the ERC.

	Q2-Q4 2020	Q1-Q3 2021
Maximum qualified wages (plus, if applicable, qualified health care expenses) per employee	$10,000	$10,000 per quarter
ERC calculation	50%	70%
ERC funding available	$5,000 max per employee for 2020	$7000 max per employee per quarter
Maximum ERC available per employee	$5,000	$21,000

Note: Qualified health expenses (employer- or employee-paid through a Section 125 plan) can be included to bring an individual employee’s qualified earnings up to the per-period limits.

In my experience, small nonprofits with 3 to 7 employees average payments of about $70,000 through this program, while larger nonprofits with 8 to 15 employees have been eligible for an average of $175,000. The larger the payroll, the bigger the credit.

One of my clients – an independent school – will receive $300,000. That’s big money!

Because the credit is based on a per-employee, per-quarter calculation, the amount your nonprofit may claim will vary.

Who can help you?

If you think your organization might qualify, speak to your CPA, tax preparer, or a financial advisor.

Be wary of companies that offer to process your application in exchange for a large percentage of your payment. Yes, the program is a bit complicated and nuanced, but you can navigate the process with integrity and accuracy – and you can get help without spending an excessive amount of money.

FAQs

What’s the catch?

No catch – this is legitimate. If you qualify, you qualify. Due to huge demand and an IRS backlog, it can take eight to sixteen months to receive your payment, so don’t start spending it yet.

Are we eligible if we received PPP or Shuttered Venue grants?

Absolutely. However, you can’t offset the same payroll twice. For example, if your quarterly payroll was $100,000 – and you applied for $80,000 in PPP forgiveness based on payroll during that period – you can only claim ERC against the remaining $20,000.

What’s the deadline?

You can claim the credit by filing an amended quarterly payroll tax return (IRS Form 941X). The deadline to file amended returns is three years from the original filing due date.

Therefore, the deadline to file for Q2 2020 is coming up in July 2023. The last opportunity to apply for most nonprofits will be for October 2024 for Q3 2021 payroll.

Given our small payroll, can we still qualify?

Yes! The ERC is a credit against applicable payroll expenses (and in some cases, eligible healthcare expenses) paid to employees during a time when your organization was impacted by the pandemic … regardless of the size of your payroll.

If we receive the ERC, will we need to amend our tax returns?

The rules are unclear. Discuss this with your tax preparer, who may recommend that you amend your Form 990 after the funds arrive. I expect that the IRS will issue a ruling to clarify the expectations for nonprofits.