While many nonprofits have already taken advantage of the opportunities available to them under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent COVID-19 relief legislation, there are still financial benefits to be had. Specifically, nonprofits may be eligible for more benefits under the Employee Retention Credit (ERC), a refundable payroll tax credit available in 2020 and 2021 for employers, including nonprofits, whose operations were fully or partially suspended because of a COVID-19-related government order, or that had certain revenue losses compared to 2019. The ERC rules were expanded and liberalized from 2020 to 2021, so employers that might not have benefited under the original 2020 rules could be eligible in 2021.
Nonprofits that have not claimed the ERC but are eligible to do so can file amended payroll tax returns. The deadline to file these returns is April 15, 2024 for the 2020 ERC and April 15, 2025 for the 2021 ERC.
Key ERC Rules
Nonprofits That Received PPP Loans May Be Eligible. Originally, under the CARES Act, a nonprofit that received a Paycheck Protection Program (PPP) loan was not eligible for the ERC at all. Subsequent COVID-19 legislation retroactively eliminated this rule; however, the ERC still cannot be claimed for the same wages a nonprofit claimed for PPP loan forgiveness (i.e., no "double dipping").
Eligibility Requirements. For both 2020 and 2021, a nonprofit is eligible for the ERC if its operations were either fully or partially suspended by a COVID-19 government order. Many nonprofits will meet this requirement for 2020 and at least part of 2021, as government orders caused many nonprofits to suspend or modify in-person learning or cancel important events, or perhaps impacted operations because of vaccine mandates. In addition, for 2021, a nonprofit is eligible for the ERC if it experienced a 20% quarter‑over‑quarter decline in revenue compared to the same quarter in 2019. For 2020, the revenue decline criterion was a steeper 50% quarter-over-quarter decline compared to the same quarter in 2019.
Increased Credit Amount for 2021. One of the most beneficial changes from 2020 to 2021 is the amount of the ERC. Under the CARES Act, the ERC was capped at $5,000 per employee in 2020 (a maximum of $10,000 in qualified wages for each employee times a 50% tax credit rate). However, for the first, second, and third quarters of 2021, the maximum per-employee credit amount is equal to $7,000 per quarter ($10,000 in qualified wages times a 70% credit rate). Thus, the maximum credit for 2021 is $21,000 per employee. The ERC expired after the third quarter of 2021; thus, wages paid after the third quarter of 2021 are not eligible for the ERC.
Credit for Wages Paid to Working Employees. Another liberalization in 2021 concerned the availability of the credit for wages of working employees. In 2020, an employer with more than 100 full-time equivalent employees in 2019 could claim the ERC only for wages paid to employees who, because of COVID‑19, were not working or were working a reduced schedule without a corresponding reduction in wages. For 2021, this threshold was raised to 500 full-time equivalent employees. Thus, for the first three quarters in 2021, a nonprofit with no more than 500 full-time equivalent employees can claim the credit for wages paid to employees who continued working.
Wages Eligible for the ERC. Wages eligible for the ERC include an employee's regular salary, as well as the employee's share of health benefits paid by the employer.
Venable has been advising nonprofits on all aspects of the ERC, including analyzing eligibility for the credit, advising on the procedures for calculating and claiming the credit, reviewing and preparing credit calculations, and assisting with necessary payroll tax filings.