Last week, in conversations with the staff at the church I attend, I learned the organization had failed to take the generous employee retention credits to which it was entitled. A roughly $160,000 error.
And then the reason I’m writing this. And sorry to suggest this. But I’m thinking you may be a member of a local church, mosque, temple or synagogue which has similarly bungled this opportunity. Or that maybe you spend time working with a local charity and that that organization has bungled the opportunity.
So I want to go over the details of the employee retention credit as it connects to tax-exempt organizations. Give you some examples of tax exempt employee retention credits. And then end with providing some next steps you may want to take so the tax-exempt organizations you care about get a tax benefit that Congress intended and provided them.
Section 501(c) Organizations Qualify
The first thing to know: Tax-exempt organizations get to take employee retention credits.
More precisely, any of the tax-exempt organizations described in Section 501(c) qualify. That means the house of worship you attend. It probably means the not-for-profit organization you volunteer at. It probably includes any social or fraternal organizations you join.
The credits can be as much as $5,000 per employee per year in 2020 and as much as $7,000 per employee per quarter in 2021.
In 2020, the employee retention credit equals up to 50 percent of the wages paid to an employee but no more than $5,000 for the year.
In 2021, the employee retention credit equals up to 70 percent of the wages paid to an employee but no more than $7,000 for the quarter.
Eligibility Works Roughly the Same
Next thing to note? A tax-exempt organization becomes eligible the same way a regular for-profit trade or business does.
It can start a new trade or business.
A government order can fully or partially suspend its operations.
Gross receipts can decline by more than fifty percent in 2020 or more than twenty percent in 2021.
Different Accounting for Gross Receipts
The one wrinkle about the above rules? The gross receipts accounting works differently for tax-exempt organizations.
For-profit trades or businesses use the accounting rules described in Section 448 of the Internal Revenue Code. Tax-exempt organizations use the accounting rules described in Section 6033 of the Internal Revenue Code.
In one of the IRS notices that explain how to calculate and claim refunds, the IRS goes into the details. But I’m going to copy and paste the meat of that guidance here:
‘gross receipts’ means the gross amount received by the organization from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus, gross receipts includes, but is not limited to, the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts, the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts, gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption), the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and the gross amount received as investment income, such as interest, dividends, rents, and royalties.
Tax Exempt Employee Retention Credits vs. Paycheck Protection Program
One other thing to mention. In talking with staff at tax-exempt organizations, I’ve heard people mention that they believe they don’t qualify for employee retention credits because the organization received a PPP loan.
That’s sort of true. Or was true. But you want to understand the history and the details here.
Originally, an employer chose between employee retention credits and the paycheck protection program (PPP). Firms that received a PPP loan, in the beginning, got disqualified from getting an employee retention credit.
Later changes to the law tweaked this, however. And the new rule says you cannot not get employee retention credits for wages paid using PPP money.
For example, if an employer such as a nonprofit organization paid $300,000 in wages but used an $100,000 PPP loan, it can only get employee retention credits on the $200,000 of wages paid over and above the $100,000 of PPP money.
Some Examples of Tax Exempt Employee Retention Credits
Let me quickly provide some examples of tax-exempt organizations getting employee retention credits.
I’m going to paint in broad brushstrokes here to get you thinking about how this might work for tax-exempt organizations where you participate.
Government Orders Closed Worship Services
A first example: Say state or local government orders prevented your church, temple, or mosque from holding worship services from March 15, 2020 through May 31, 2021. You guys should qualify for employee retention credits during that period time. Even if you cobbled together some sort of online substitute service.
Substantial Decline in Contributions
A second example: Say a not-for-profit organization saw contributions and activity decline as the pandemic ramped up as compared to 2019. Maybe the organization usually collects dues and fees from members for activities and those activities stopped in the spring of 2020 and are only just now beginning to restart.
If gross receipts declined by more than fifty percent for some quarter of 2020 as compared to the same quarter of 2019? Your non-profit qualifies.
If gross receipts decline by more than twenty percent for some quarter of 2021 as compared to the same quarter of 2019? Your non-profit qualifies.
Note: This other blog post explains how substantial declines in gross receipts work: Full or Partial Suspensions.
New Trade or Business
Employers may also qualify for employee retention credits in the third and fourth quarter of 2021 if they begin carrying on a new trade or business after February 15, 2020. That may not happen as commonly with tax-exempt organizations, but a couple of quick examples show how a new program or initiative might work.
Suppose a tax-exempt school opens a food bank to support some of its students’ families. Perhaps the food bank is response to the economic hardship created by the COVID-19 pandemic. That food bank can probably qualify the tax-exempt organization for employee retention credits.
Another example: What if a religious organization buys rental property to provide housing to families threatened with homelessness due to pandemic-related unemployment. That rental property can probably qualify the tax-exempt organization for employee retention credits.
Note: We talked about how the recovery startup business employee retention credits works here, Recovery Startup Business Employee Retention Credits, and and rental properties can trigger employee retention credits here: $100,000 Real Estate Employee Retention Credits. But the same general principles should apply for a tax-exempt organization.
Next Steps for Tax Exempt Employee Retention Credits
Talk with your tax-exempt organization’s treasurer. Or the accountant or the bookkeeper.
You want to move quickly. The easiest way to get the credit is when you file the quarterly 941 payroll tax return.
You can also go back and amend prior quarter 941 payroll tax returns. That’s more work. And the organization waits many weeks for the money.
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