It is not often that associations and other not-for-profit organizations can avail themselves of significant tax credits for having continued to conduct general business operations and pay their employees. But that is what the Employee Retention Tax Credits (ERC) program was designed to do. Unlike many tax credit programs, ERC did not require investment in qualified real estate or capital improvements. Many not-for-profits have benefited from ERCs. However, the cost of the program to the government has been significant and, much like the Paycheck Protection Program (PPP), there has been a high degree of fraud associated with the program. For these and other reasons, there is currently legislation pending that, if passed, would terminate the ERC program retroactively to Jan. 31, 2024, if the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) is approved. Until or unless that legislation becomes law, there is one important deadline to be aware of that will mark the end of ERC: April 15, 2025.

What are ERCs?

ERCs are a payroll tax credit made available under the CARES Act and, later, as part of the SECURE Act. The purpose was to encourage employers to retain and pay employees during the economic challenges of the global pandemic by providing those businesses with a tax credit if certain qualifying conditions were met. ERCs are entirely different from PPP loans, and organizations that received PPP funding can still be eligible for claiming ERCs. 

While commercials on radio and social media have made it sound like claiming ERCs is a simple process and every business can qualify, the reality is that there is complexity when it comes to this significant opportunity for financial relief. Eligibility is perhaps the most misunderstood component of ERC, but periods covered, amounts to be claimed, and the deadlines for claiming ERCs are also misunderstood.

How is eligibility determined?

In simple terms, eligibility can be met in any of the following three ways: 

1. Having had a significant decline in gross receipts
2. Having been subject to one or more government orders that shut down, suspended, or restricted operations
3. Qualifying as a recovery start-up business

The details regarding qualifications for each of these areas are too complex for this article, especially regarding the shutdown of business and qualifying as a recovery start-up business. 

Eligibility under the significant decline in gross receipts test is one of the most common ways of qualifying for ERCs. For not-for-profit organizations, there are nuances to calculating a decline in revenues, so one cannot determine eligibility merely by looking at a statement of activities. Gross receipts are calculated under the same methodology used and reported on the first page of Form 990, Box G. 

Is it worth it? How much can an organization expect to claim?

The exercise to determine eligibility is worth the time invested in the calculation. While the total amount of ERCs will vary from one organization to another, the total amount available to be claimed is up to $5,000 per employee paid in 2020 and up to $21,000 per employee paid in 2021. If an organization received PPP loans, any wages and/or employer health insurance premiums that were used to obtain PPP loan forgiveness must be excluded from the ERC calculation.

How are ERCs claimed?

Although the period for the eligible wages has passed, ERCs can still be claimed by filing amended Form 941 for any past eligible quarters. 

Has the deadline passed for claiming ERCs?

As a reminder, the deadline for claiming ERCs for 2021 wages is April 15, 2025, unless the pending legislation is passed, which would terminate the program earlier.

Is there a downside to claiming ERCs?

There is no downside to claiming ERCs if you meet the requirements for eligibility and have accurately calculated the credits. Keep in mind there is a risk that the IRS may audit the amended payroll returns and the ERCs being claimed, and may determine that some or all of the credits must be repaid due to failing the eligibility test or having errors in the calculations of the credits. The IRS guidance requires that detailed records must be maintained to document eligibility and the determination of the credit amounts claimed. If you have already filed for ERCs and subsequently determined you do not qualify for the credits, the IRS currently allows you to withdraw your claim if you have not yet received the refund or if you received a refund check but have not cashed it yet.

The latest from the IRS

The IRS previously announced it was increasing the number of audits of amended returns and carefully reviewing qualifications for ERCs claimed. As a result, claims were taking longer to process. Additionally, the IRS cautioned businesses about third parties that aggressively market ERC services and provide misleading information about claiming the credits. In September 2023, the IRS placed a moratorium on processing new ERC claims filed after Sept. 14, 2023, and recently ended the moratorium for filings made after Sept. 14, 2023, but by Jan. 31, 2024. On Aug. 8, 2024, the IRS issued a news release (IR 2024-203) that provided an update on the status of ERC processing, ERC audits in process, and interesting data regarding fraudulent claims. Perhaps most notably, the IRS announced it will begin processing what it considers low-risk claims more quickly, with payments expected to start flowing in the Fall.  

Conclusion

ERCs can be significant and should be considered by all not-for-profits. The credits can help replenish reserves that were used to meet payroll and other obligations during the global pandemic. Determination of eligibility and calculation of ERCs can take some time and should not be done in a hurried fashion. Similarly, it can take some time to receive refunds after filing. The IRS’s backlog and moratorium on processing claims was resulting in delays of nine months or longer, but it sounds like the IRS is now working through the backlog so filers should see their claims being processed in the near future. As a reminder, the deadline for claiming ERCs for 2021 wages is April 15, 2025, unless the pending legislation is passed, which would terminate the program earlier.