Tax Tips Logo ImageISSUE:

Section 2301 of the CARES Act, as originally enacted, provides for an employee retention credit for eligible employers, including tax-exempt organizations, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. Section 206 of the Relief Act adopted amendments and technical changes to section 2301 of the CARES Act for qualified wages paid after March 12, 2020.  Section 207 of the Relief Act, which is prospective only, further amends section 2301 of the CARES Act to extend the application of the employee retention credit to qualified wages paid after December 31, 2020, and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time.  Subsequent rulings extended the ERC through December 31, 2021.

 

SITUATION:

Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

The Finance Team at MBC has been working on the possibility of their institution’s taking advantage of the Employee Retention Credit(s) (ERC).  They tell us that they have heard that an institution might use a prior quarter comparison in order to qualify for a subsequent quarter’s eligibility for the ERC.

They tell us, “We experienced a decline in gross receipts from the fourth quarter of 2020 – as compared to the fourth quarter of 2019 – of 39%.  This does not ‘qualify’ the fourth quarter of 2020 in and of itself as a 50% decline in gross receipts was required for the ‘2020 ERC.’  Then, in the first quarter of 2021, our decline in gross receipts compared to the first quarter of 2019 was only 14% – when the ‘2021 ERC’ requires at least a 20% decline.  Might the ‘alternative quarter election’ help us?”

The answer is likely YES. Based on an update of the ERC rules (see IRS Notice 2021-23), an institution can use the immediately preceding calendar quarter to qualify for a given quarter.  That would mean that for the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth calendar quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met – needing only a 20% decline in gross receipts to “qualify” the first quarter of 2021.  Is everyone confused?!

**An election to use an alternative quarter to calculate gross receipts is made by claiming the employee retention credit for the quarter using the alternative quarter to calculate gross receipts.

 

RULES:                                                                        .

From IRS Notice 2021-23,  Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021, pages 6-7:

[However,] section 2301(c)(2)(B) of the CARES Act, as amended by section 207(d)(2) of the Relief Act, permits an employer to elect to use an alternative quarter to calculate gross receipts. Under this election, an employer may generally determine if the decline in gross receipts test is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019 (substituting 2020 for 2019 if the employer did not exist as of the beginning of that quarter in 2019).

Accordingly, for the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth calendar quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met. If an employer was not in existence as of the beginning of the fourth calendar quarter of 2019, then the alternative quarter election will not be available for the first calendar quarter of 2021.

 

BOTTOM LINE:

  • IRS Notice 2021-23 is a 17-page document that gives “Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021”
  • Your institution should carefully review/assess whether you are an “eligible employer” for ERC purposes.
  • The “alternative quarter election” might be very beneficial to your institution when assessing the ERC opportunities.
  • Claiming the ERC may generally be accomplished by filing Form 941, Form 941-X, or Form 7200 – depending upon the circumstances.

 

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The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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