How the Employee Retention Credit Can Benefit Nonprofit Organizations

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Jun 15, 2023, 18:01 ET

FORT LAUDERDALE, Fla., June 15, 2023 /PRNewswire/ -- EZ-ERC discusses how nonprofits can benefit from government stimulus programs. Charitable giving reached a record high of $471 billion in 2020^¹, which is an incredible testament to the work and spirit of the charities themselves. However, as a result of this record-giving year, many nonprofit organizations ("NPOs") had no revenue decline during 2020 and/or 2021. We find all too often that because of this fact, many NPOs may still be under the incorrect assumption that they do not qualify for the Employee Retention Credit (ERC).

Nonprofit organizations still have time to benefit from the Employee Retention Credit for the 2020 and 2021 tax quarters by filing amended returns—and can do so with minimal risk.

Choosing the right third-party ERC firm to assist you with your claim can help you navigate the complicated ERC tax code to optimize your payout and minimize the risk of costly IRS audits.

There are two avenues of eligibility for ERC and only one needs to be met. The first is an objective test, which looks to see if there was a substantial decline in revenue, however, there is a second avenue of eligibility for ERC under the partial suspension of operations test, which is completely agnostic as to revenue and looks to see how COVID-19 related state and local orders adversely impacted the company's operational output. The "full or partial suspension of operations test (or "FPSO") is not a financial statement test. Therefore, a business is not required to have any decline in gross receipts to evidence the existence of an FPSO.

Congress created the FPSO test recognizing that: (1) gross receipts do not always tell the full picture of a business' COVID-19 hardship; and (2) even profitable businesses may have had to make tough employee retention decisions due to COVID-19-related changes to their business. For example, a company may be successful in one line of business and not another, causing total revenue to increase while certain business lines suffer or diminish. The ERC was designed to encourage the retention of employees in both profitable and non-profitable businesses.

COVID-19-Related Impacts on Nonprofits

For many nonprofits and their employees, temporary or total shutdowns and other financial impacts of COVID-19 and government COVID-19-related regulations were detrimental. Depending on their unique missions, some nonprofits saw an increased need for services while others were deemed nonessential or required heavy social distancing, which led to significant business interruptions for their day-to-day operations.

These interruptions led to decreased services and impacted jobs at mission driven organizations. According to a recent study published in the Journal of Consumer Affairs, the US nonprofit sector lost over 900,000 jobs during the pandemic and created financial hardship for many nonprofit organizations by impacting donor intent, revenues from fee–for–service programs, and grant funding availability.

These impacts affected each nonprofit sector differently: healthcare had the lowest job losses of −3.7%, while arts, entertainment, and recreation suffered the higher losses of −34.2%. Regardless of these losses, nonprofits that retained any of their employees during the COVID-19 pandemic may still qualify for the ERC even if they didn't see a decline in revenue.

In our experience, CPAs and Auditors of NPOs have been overly fixated on the revenue aspect of an NPO during 2020-2021, however, it's important to note that the ERC was not intended to be a revenue replacement like the PPP was, but rather, a reward for retaining employees despite adverse face-to-face working conditions.

We encourage all NPOs to do their own research and speak with a qualified advisor in order to understand whether any eligibility was missed. We are generally finding our clients ERC in excess of their first-round PPP loan, and therefore, given the magnitude of what's at stake, it is important to make sure all avenues are considered.

Greatest Benefit for Nonprofits

Most nonprofit dollars and donations are restricted to specific spending. Personal contributions may be limited to one family, scholarship, or event. Grant funding might only be allowed for program materials, reporting, or administrative costs. Employee Retention Credit is unrestricted and can be used to bolster any programs or objectives within your organization. An increase in non-restricted funds can alleviate the burden of impacted services and be used to create or support new services or programs where your nonprofit's mission can have the largest impact.

¹2021 also saw record breaking giving at $485 billion yet, when looking at inflation, giving was down 0.7% in 2021 verses up 3.8% in 2020 (source).

Author: Maxwell Burns, CPA

Managing Director, EZ-ERC

CONTACT: [email protected]

SOURCE EZ-ERC