Most organizations have taken advantage of the PPP loans, which have been instrumental in helping organizations stay afloat during the pandemic. Many agencies, however, are not aware of the Employee Retention Tax Credit (ERTC). The ERTC was part of the original CARES Act but didn’t get a whole lot of attention because organizations had to choose between the ERTC or PPP. In December 2020, new regulations were released allowing organizations that received PPP funding to also obtain ERTC funding if they qualify. This has opened the door for organizations to consider retroactive application for ERTC funding.
Similar to PPP, there were two distinct funding rounds with two separate criteria – the 2020 round and the 2021 round. The 2020 funding is much more restrictive and much smaller than the 2021 funding, and it is not as attractive to organizations with more than 100 employees in 2019. The 2021 round increased that threshold to 500 employees.
In order to qualify for the 2020 round of ERTC, you had to experience at least a 50% decline in revenue during a calendar quarter or experience a shut-down or partial shut-down of your organization that had more than a nominal impact (10%) on your operations. The shut-down/partial shut-down must be attributable to regulations released by a governmental agency, such as the CDC or OSHA, directly attributable to health and safety protocols due to COVID. The credit is limited to 50% of the first $10,000 of an employee’s wages and employer paid health benefits paid during the year and is evaluated on a quarterly basis. Once an organization hits the 50% decline in a quarter they can continue to qualify for the credit until such time as their revenue is at least 80% of their 2019 levels (same calendar quarter) or until the shut-down was lifted.
For example, if your nonprofit experienced a 75% decline in revenue during the second quarter of 2020, 55% decline in the 3rd quarter of 2020, and a 30% decline during the 4th quarter of 2020, your organization would qualify for all 3 quarters. And since the shut-down occurred on March 18th, you may actually be able to qualify beginning in March.
If you received PPP funding, you cannot double dip … you cannot receive ERTC funding for the same salaries you received PPP for. For instance, if you received $1 million of PPP funding and you had $1.5 million in salaries and $200,000 in non-salary expenses reflected on your PPP forgiveness application, the $800,000 of salaries that you received PPP forgiveness for cannot be used to apply for ERTC.
The 2021 round of ERTC is even more attractive in that you only need to have a 20% decline in any quarter, with the previous quarter also serving as a safe harbor. So, in the above example, since the organization had a 30% decline in the fourth quarter of 2020 verse the 4th quarter of 2019, they automatically qualify for ERTC for the first quarter of 2021 even if the decline between the 1st quarter of 2019 to the first quarter of 2021 is less than 20%. In addition, while the 2020 credit is limited to $5,000 per employee for the entire year, the 2021 credit is 70% of the first $10,000 of wages and health benefits per quarter. So if your agency qualifies for all four quarters, you could obtain a credit of up to $28,000 for an employee that earned at least $10,000 per quarter. Please note, that there is legislation that has passed the Senate and is sitting with the House that could end the ERTC benefit in September, with the balance of the funds earmarked for the infrastructure bill still being debated on Capital Hill. Once any legislation is passed, we will keep you informed.
Many organizations that are eligible for the ERTC also qualified for the second draw of PPP, so you need to really analyze your operations to maximize the benefit of two funding streams. Please keep in mind that if you have deficit funded contracts, FMLA funding, or restricted grants that cover any of your salaries, you cannot also receive CARES Act funding for these employees, so you should exclude them from forgiveness and from ERTC. Before you do, however, consider speaking to your funders to see if they will allow you to either defer the funding or utilize the finding for non-salary related costs.
The calculations to calculate the maximum eligibility can get somewhat complicated and takes significant analysis, so make sure you schedule out all periods to maximize the results.
To access ERTC funding, you need to speak to your payroll company/PEO, and you may need to file amended payroll tax filings, re-enter payroll information, etc. Each payroll company has their own way to handle the credit.
As always, we are here to support the nonprofit sector, so if you have any questions, please feel free to reach out and ask.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.