A requirement of the Employee Retention Credit (ERC) is that the taxpayer be carrying on a trade or business. For a further discussion of this, see the article “What Businesses Are Eligible for the ERC.” An exception was made specifically for 501(c ) organizations (non-profits). Specifically, all 501(c ) entities will be deemed to be a trade or business for purposes of Employment Retention Credit (ERC) eligibility.
One of the major differences for non-profits is that a different concept for gross receipts applies to 501 (c ) entities.
To look at how the IRS currently views gross receipts for a non-profit, refer to IRS Notice 2021-20, Question 25, where the IRS states:
Question 25: What are “gross receipts” for a tax-exempt employer?
Answer 25: “Gross receipts” for purposes of the employee retention credit, for a tax-exempt organization, has the same meaning as under section 6033 of the Code. Under the section 6033 regulations, “gross receipts” means the gross amount received by the organization from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus, gross receipts includes, but is not limited to, the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts, the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts, gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption), the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and the gross amount received as investment income, such as interest, dividends, rents, and royalties. 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 gross receipts received for the same calendar quarter in 2019.
It is important to note that gross receipts are from all operations, not only from activities that constitute unrelated trade or business. Gross receipts are from all sources received by the organization, which includes total sales (net of returns and allowances) and all amounts received for services. Whether sales or services are substantially related to the organization’s exercise or performance of the exempt purpose is meaningless for this calculation.
Also of note is that gross receipts include the organization’s investment income, including from dividends, rents, and royalties. It must include gross amounts received as contributions, gifts, grants, and similar amounts. It also must include gross amounts received as dues or assessments from members or affiliated organizations. All sources is the key to understanding what to include in the gross receipts calculation.
Once a non-profit determines its eligible gross receipts, the calculation for the Employee Retention Credit (ERC) would be based on the same rules as a for-profit business. To explain these rules, see the article “How to Calculate the Employee Retention Credit (ERC).“
To determine whether there has been a significant decline in gross receipts, a tax-exempt employer needs to compute its gross receipts from all of its operations during a calendar quarter and compare those gross receipts to the same gross receipts received for the same calendar quarter in 2019. This is detailed in the article “Gross Receipts Test and the ERC.”
To determine whether a non-profit has been partially suspended, a non-profit would look to the same rules as a for-profit business. This is discussed in the article “Employee Retention Credit (ERC) and Partial Suspension.”
Once the Employment Retention Credit has been approved, a non-profit will claim the credit through its normal payroll process, which is detailed in the article “How to Apply for the Employee Retention Credit.”
While we do not anticipate that a non-profit will be an audit target, we do believe that any entity claiming a large credit will need to justify that credit with the IRS. Since this credit in particular is 70% of wages, quarter-by-quarter in 2021, the amounts can become significant. This makes an IRS audit more likely. Non-profits should look at the article delineating which documents should be kept for the Employee Retention Credit. (See article “Which Documents Should an Entity Keep for the Employee Retention Credit.“)
The Employee Retention Credit (ERC) is a valuable tool for non-profits. This was meant to help non-profits recover from COVID-19 and resume operations. All 501(c ) organizations (non-profits) should see if they qualify for this valuable credit.