Navigating the Employee Retention Credit: Essential Insights for Nonprofits

December 29, 2023
group of employees at a nonprofit

Key Takeaways

  • Nonprofits can qualify for the Employee Retention Credit (ERC) if they meet specific criteria, including government-ordered suspension, significant revenue drops in 2020 and 2021, and payroll costs incurred for retaining employees.
  • Nonprofits should recognize ERC revenue and corresponding receivables following the conditional contribution model in ASC 958-605.
  • Nonprofits must adhere to GAAP principles for presenting and disclosing ERC-related information.

The Employee Retention Credit (ERC) allows eligible employers to receive reimbursement for a portion of wages paid to employees during the Covid-19 Pandemic.

Nonprofits can qualify for the ERC. They also need to ensure that any ERC revenue is appropriately documented and supported based on the facts and circumstances in place when financial statements are available to be issued.

Nonprofit Criteria for the ERC Program

Nonprofit organizations should follow current U.S. GAAP accounting for government grants under ASC 958-605. This standard recognizes conditional contributions “when the condition or conditions on which they depend are substantially met” (ASC 958-605-25).

There are specific criteria for the ERC program and nonprofit entities should carefully consider and maintain documentation demonstrating credit eligibility, including:

  • Nonprofit was fully or partially suspended by government order.
  • Nonprofit saw 2020 gross receipts fall below 50% of the same calendar quarter in 2019 or
  • Nonprofit saw 2021 gross receipts fall below 20% of the same calendar quarter for 2019.
  • Organization incurred payroll costs to retain employees.

Recognizing ERC Revenue as a Nonprofit

The government appears to have provided the credit “without the intent of exchanging goods or services of commensurate value” and had “full discretion in determining the amount.” Therefore, the ERC is a nonexchange transaction and nonprofit organizations should account for the credit as a contribution.

Nonprofits can recognize the ERC revenue and any corresponding receivables in the period they determine the conditions are substantially met under the conditional contribution model in ASC 958-605.

When making this determination, the nonprofit should assess whether the process for filing for the credit is more than, or only an administrative barrier to, receiving the credits. This will allow the organization to determine if they meet the conditions to remove the barrier for recognition and recognize revenue for the ERC.

Follow GAAP Guidance When Recognizing ERC

The presentation and disclosure principles under the accounting guidance included in ASC 958-310-50-4 should be followed for disclosing the ERC. In U.S. GAAP, netting income with expenses incurred is not encouraged because GAAP generally does not permit net presentation in financial statements.

Nonprofit entities must consider whether such presentation would be misleading to the financial statement user and should ensure adequate disclosures are made about the amount and nature of the credits received.

Nonprofits should recognize “a refundable advance until the conditions have been substantially met or explicitly waived by the donor” (ASU 2018-08). Once the entity determines the conditions have been met or explicitly waived, revenue is recognized as earned and the refundable advance is removed.

ERC Tax Reporting Guidance for Nonprofits

For tax reporting purposes, the IRS indicated for taxable organizations the ERC needs to be taken as a reduction to salary expenses in the year the wages were paid.

However, there has been no technical guidance released with respect to the treatment of ERC payments for exempt organizations. Tax-exempt organizations generally follow the method of accounting used in their books and records. For tax-exempt organizations that follow GAAP, the ERC is typically reported as contribution revenue rather than a reduction to wage expense.

Given there would be no impact on tax, the American Institute of Certified Public Accountants (AICPA) nonprofit members have stated the ERC should be treated as government grant revenue and not a reduction in wages. If wages were utilized for reporting unrelated activities on Form 990-T, the ERC should be treated as a reduction of expenses on that return.

Documentation and Support for the ERC

Documenting eligibility and tracking the wages used to recognize the ERC revenue or other federal funding is important to ensure accounting treatment is appropriate and the claim properly supported.

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The ERC is available to businesses, nonprofits, and more. 

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