Tax Tips Logo ImageISSUE:

The Consolidated Appropriations Action, 2021 (CAA) – (enacted December 27, 2020) expanded the Employee Retention Credit to entities that received a PPP loan/grant and extended the credit through June 30, 2021.  Today we have Part I of a three-part series on the ERC.

 

 

SITUATION:

Troas Bible College (TBC) 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.

TBC’s CFO told us, “Unfortunately, we do not qualify for the Employee Retention Credit because our institution did not show a more than 50% reduction in gross receipts for any quarter in 2020 compared to the same quarter in 2019.”

“Well,” we said, “remember there are two codicils to the ERC and they are either/or.  Your institution can meet the ‘subject to a governmental order to fully or partially suspend its business operations’ requirement and take advantage of the ERC even if you do not have a greater than 50% reduction in gross receipts.  Also, remember there is now a 2021 ERC that only requires a more than 20% reduction.”

“Okay, but define ‘fully or partially suspend our business operations’.

“Based on some of the IRS FAQs, you might take the position – if your institution had to shut down in-person operations due to a qualifying government order (i.e. send the students home) – that this could qualify.  You may continue instruction via distance learning, but the ‘student life operations’ would be suspended.”

The CFO then asked, “Don’t we still have to have the 50% reduction to calculate the ERC and know the period for which we are an ‘eligible employer’?”

“No.  Under the ‘government order’ requirement, you can utilize the ERC only for periods during the calendar quarters in which the trade or business operations were fully or partially suspended.  In other words, during the timeframe that the government order was in force.”

NOTE: The IRS Website, “FAQs: Employee Retention Credit under the CARES Act” has not been updated for the CAA, but generally the Qs and As still apply to the ERC.  It can be found at:

FAQs: Employee Retention Credit under the CARES Act | Internal Revenue Service (irs.gov)

 

RULES:                                                                        .

From IRS FAQs “FAQs: Employee Retention Credit under the CARES Act”:

38. If an employer is subject to a governmental order to fully or partially suspend its business operations and the order is subsequently lifted, is the employer considered to have business operations that were suspended?

Yes, but only for periods during the calendar quarters in which the trade or business operations were fully or partially suspended. If the order was effective for a portion of the calendar quarter, then the employer is an Eligible Employer for the entire calendar quarter but can only claim a credit for wages paid during the period the order is in force.

Example: State Y issued a governmental order for all non-essential businesses to close from March 10 through April 30 and the governmental order was not extended. Pursuant to the order, Employer H, which operates a non-essential business in State Y, closes from March 10 through April 30. Employer H is an Eligible Employer in the first quarter (for wages paid from March 13, the effective date of section 2301 of the CARES Act, through March 31) and the second quarter (for wages paid from April 1 through April 30).

 

BOTTOM LINE:

  • The Employee Retention Credit (ERC) was expanded and extended with the enactment of the CAA.
  • The ERC should really be viewed as two programs: 1) the 2020 ERC and 2) the 2021 ERC.
  • Carefully consider whether your institution was under a government order to fully or partially suspend its business operations.
  • For institutions who received a PPP loan/grant, you may be able to report all of your 2020 ERC on your fourth quarter 2020 Form 941 – rather than amending 941s for the second and third quarter of 2020.

 

Specific questions? Email Dave Moja

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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