Tax Tips Logo ImageISSUE:

The IRS has not updated their Employee Retention Credit (expanded and extended) FAQs.  However, we eagerly await further guidance.  Today we have Part II of a three-part series on the ERC.

 

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.

MBC’s Controller called to ask us about the 50% reduction in gross receipts.

“I’ve been working on our PPP2 application and the 25% reduction in ‘gross receipts.’ The ERC concept of gross receipts and a 50% decline seems different from that used for the PPP.  Is that true?

We answered.  “Yes.  The “decline” and “reduction” methodologies are different.  And, remember, for “2021 ERC” only requires a 20% decline in gross receipts.  Also, the fourth quarter of 2020 may be used as a qualifying quarter for 2021.

 

RULES:                                                                        .

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

  1. How is the significant decline in gross receipts calculated?

A significant decline in gross receipts is calculated by determining the first calendar quarter in 2020 (if any) in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. If the gross receipts decline to that extent, the employer also must later determine if there is a later calendar quarter in 2020 in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019. If so, the significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

Example: Employer I’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, Employer I’s 2020 first, second, and third quarter gross receipts were approximately 48 percent, 83 percent, and 92 percent of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, Employer I had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50 percent of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80 percent of the same quarter in 2019). Thus, Employer I is entitled to a retention credit with respect to the first and second calendar quarters.

  1. What are “gross receipts” for a tax-exempt employer? (updated June 19, 2020)

Solely for purposes of determining eligibility for the Employee Retention Credit, gross receipts for a tax-exempt employer include gross receipts from all operations, not only from activities that constitute unrelated trades or businesses.  For example, gross receipts for this purpose include amounts received by the organization from total sales (net of returns and allowances) and all amounts received for services, whether or not those sales or services are substantially related to the organization’s exercise or performance of the exempt purpose or function constituting the basis for its exemption. Gross receipts also include the organization’s investment income, including from dividends, rents, and royalties, as well as the gross amount received as contributions, gifts, grants, and similar amounts, and the gross amount received as dues or assessments from members or affiliated organizations.

To determine whether there has been a significant decline in gross receipts, a tax-exempt employer computes its gross receipts received from all of its operations during the calendar quarter and compares those gross receipts to the same gross receipts received for the same calendar quarter in 2019.

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.
  • For the “2021 ERC,” your institution might use the fourth quarter of 2020 as a qualifying quarter.
  • Carefully review your ERC calculations to ensure that you do not “double dip” with HEERF, PPP1, PPP2, or FFCRA expenditures.

 

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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