The Employee Retention Tax Credit (ERTC) was enacted as part of the early COVID-19 stimulus measures, and can be claimed through Dec. 31, 2021 by eligible employers who retained employees during the COVID-19 pandemic. Earlier this year, the ERTC was expanded through the American Rescue Plan Act to potentially cover more organizations and situations. While not-for-profit organizations are eager to take advantage of the ERTC, there are some logistical hurdles between taking the credit and reaping its benefits.
The ERTC is popular among qualifying not-for-profits because they can claim it even if they’ve also taken PPP loans. Organizations that qualify for the ERTC must show a significant decline in gross receipts between comparable quarters post-pandemic (2020-21) and pre-pandemic (2019), or they must have been subject to a partial or total suspension of operations. The extension enacted by the recent American Rescue Plan Act also covers disruptions from 2021 and lowers the threshold for qualification.
But it’s not as simple as checking a box and taking the credit. Not-for-profits need to consider the ERTC’s potential impact on other areas of their operations, including payroll, financial statements, and how they handle any PPP loans.
Impact on Payroll
Payroll data is critical, as the ERTC requirements involve an analysis of prior period employee counts, and may also require a detailed analysis of per-employee payroll detail. Many not-for-profit organizations use third-party payroll providers, but those providers have been known to struggle with providing the correct data. Calculations regarding full-time equivalents used for the PPP forgiveness report are not the same as calculations for full-time employees for the ERTC. Remember that even if you have taken a forgivable PPP loan, you may be eligible for the ERTC on certain wages not used to substantiate PPP loan forgiveness.
It’s imperative to work with a provider who thoroughly understands the ERTC components and can show you the data that matters for qualifying purposes; this will help you get the information you really need from your payroll provider.
Financial Statement Presentation
ERTC has a unique accounting treatment that will affect not-for-profit organizations’ financial statements. The U.S. Generally Accepted Accounting Principles (U.S. GAAP) detail that not-for-profit entities should apply the accounting model under Subtopic 958-605, including the disclosure and presentation requirements.
The accounting policy you use on similar programs like PPP loans should continue to be used for the ERTC in order to maintain consistency. Your financial statements should include disclosures about the accounting policy, details on the significant terms of the programs, and descriptions of relevant line items and amounts.
For accounting purposes, the ERTC is considered a grant that reduces the employer’s liability for its share of FICA tax, along with the FICA tax withheld from employees. If you know you are going to take the ERTC, you will retain the corresponding amount of employment taxes, without penalty, that would otherwise be deposited. For accounting purposes, organizations must still recognize the full amount of FICA expenses from employees.
COVID-19 Recovery Strategies
There is strategy involved in choosing which expenses to designate for PPP loan forgiveness, especially if your not-for-profit organization is also eligible for the ERTC. PPP loans and the ERTC cover similar costs, and you can’t take the credit for an expense that is also used to substantiate PPP loan forgiveness. Recent guidance from the IRS reveals that you can increase the wages available for the ERTC by carefully designating expenses on a PPP forgiveness application. Moreover, IRS Notice 2021-20 provides information on how employers who took a PPP loan can claim the ERTC, and also includes numerous examples of how employers with PPP loans can correctly determine which wages are eligible for the tax credit.
There’s an art to stretching the utility of your PPP loan forgiveness while maximizing your ERTC. Finding an experienced professional who can help you navigate the intricacies of the ERTC is a smart move that will help you go about the process efficiently.
Where Can I Learn More?
Using an experienced provider can help your not-for-profit organization navigate the pitfalls of this popular program. For more information on ERTC and how it impacts your business, contact a member of our team.
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