Busted: 5 Myths About Non-Profits and the ERC

Adam Taplinger

The Employee Retention Credit (ERC) is not widely known within the non-profit community.  This lack of familiarity may be a result of common misperceptions surrounding the ERC. If your non-profit hasn’t yet taken advantage of the ERC, make sure you haven’t fallen for one of these myths:

1. Our Non-Profit Must Pay Income Tax in Order to Be Eligible

The ERC doesn’t have anything to do with income tax or income tax withholdings — it is a refund of wages paid, and that refund is delivered through the payroll tax system. The credit is a cash refund issued to a non-profit in the form of a check from the IRS.

Most organizations are required to pay payroll taxes for any W2 employee. Therefore, any organization with employees may be eligible for the ERC. If your organization had employees in 2020 or 2021, the ERC is something that you should consider exploring.

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2. ERC Rules Make Non-Profit Applications Too Difficult

Non-profit organizations might be intimidated by the process of applying for the ERC, especially if tax matters are not traditionally discussed within a Board or management setting. Applying for the credit is a relatively straightforward process and hiring an expert can make that process even more accessible.

The regulations and rules for non-profits to claim the ERC aren’t much different than the rules that for-profit businesses must follow. The requirements are generally that an organization has employees and (1) the organization experienced either a decline in revenue as outlined in the ERC statute or (2) a was subject to a governmental order that impacted, suspended, or modified historically normal operations.

Once an organization’s eligibility is determined, documents establishing the rationale for its eligibility and a detailed calculation of the organization’s payroll and other vital pieces of information must be retained and memorialized.

3. Leaders Are Personally Liable for ERC Funds or Subject to Public Scrutiny

As long as the ERC is filed in good faith, managers and directors are not personally liable for any ERC funds that a non-profit organization receives. The ERC is a refund of wages that you already paid to employees. It is not a loan, and you do not have to pay it back. There is no need for a personal guarantee by any organization employee or member of the board.

Many non-profit managers erroneously believe that their organization’s ERC claim will become a matter of public record. This belief can sometimes result from the public scrutiny that followed the PPP and some cringe-worthy examples of misused funds. The main distinction between the PPP and the ERC is that the SBA governs the PPP. Under SBA rules, the loan information was subject to public disclosure. The ERC is different. ERC remains subject to the privacy regulations between any taxpayer and the IRS. For non-profits, Payroll Tax filings are not required to be publicly disclosed.

4. We Have Already Received Too Much from Other Sources, Such as the PPP

Regardless of any other stimulus or grants you received, the ERC remains one of the best options to help strengthen your balance sheet, make much-needed capital investments, or pay wages or benefits to staff.

If you received one or more PPP loans, not to worry.  This does not prohibit your group from claiming the ERC.  However, wages forgiven for PPP purposes must be considered with respect to your ERC claim.

Additionally, receiving a payroll tax refund through the ERC will not affect any other fundraising campaigns.

5. I thought that in order to be eligible for ERC, my Organization Was Required to Have a 50% Decline in Revenue, or Needed to be Closed by the Government

There is a lot of misleading ERC info floating around cyberspace. Many leaders of non-profits do not believe that they are eligible for the ERC because their organization was never fully closed. As written in the CARES act, the ERC specifically states that an entity may be eligible for ERC based on a partial closure or modification of the operations as a result of a COVID-related government order. For example, we worked with a school that, because of the common misconception surrounding fully closures, did not believe they were eligible for the ERC. We explained that the combination of restrictions around social distancing, as well as the cancellation of camps, extracurricular activities, tours, and field trips created a path to eligibility for the school.

Other organization leaders believe that they must have a 50% decline in revenue for their non-profit to be ERC-eligible. As long as your group experienced some significant COVID-related government restriction, it is highly likely that they will qualify for the ERC program.

Take Advantage of the ERC

The ERC is a substantial tax credit for which many non-profit organizations qualify. To see whether your organization qualifies or to begin a claim, let us know here.

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