Schools Eligible for the Employee Retention Credit
AAFCPAs would like to remind independent schools of the availability of the Employee Retention Credit (ERC). The ERC provides significant refundable payroll tax credits to eligible employers for both the 2020 and 2021 tax years. It is not too late to submit a claim for the ERC!
WHAT IS THE EMPLOYEE RETENTION CREDIT?
The ERC is a fully refundable tax credit for eligible employers based on payment of qualified wages and health plan expenses. The ERC applies to qualified expenses paid after March 12, 2020, and through September 30, 2021, with some limited exceptions to apply for credits into the last quarter of 2021.
WHO IS AN “ELIGIBLE EMPLOYER?”
An eligible employer is any employer carrying on a trade or business during the ERC period (March 12, 2020, through September 30, 2021), that either:
- Fully or partially suspended operation during any calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experienced a “significant decline in gross receipts” during the calendar quarter. Please, note, this definition is different between 2020 & 2021. Read more about it in our previous blog.
WHAT IS THE CREDIT VALUE?
The 2020 credit value is up to $5,000 per employee per year, and the 2021 credit value is up to $7,000 per employee per quarter. An independent school with 20 employees could be looking at as much as $100,000 in 2020 and $140,000 per quarter in 2021, for a combined total of up to $520,000 in credits (so long as the organization qualifies for all quarters).
WHAT DOES AAFCPAS ADVISE?
AAFCPAs recommends that eligible independent schools file as soon as practical to prevent further delays with your credits. The IRS is currently projecting that processing times could take up to a year and a half.
As with all tax credits, there are significant rules and potential pitfalls to avoid.
Common Questions and Answers for Independent Schools
Question 1: We have not submitted our ERC submission. When are the deadlines?
Answer: For all quarters in 2020, the deadline to apply for the ERC is April 15, 2024. For all quarters in 2021, the deadline is April 15, 2025.
Question 2: How do we apply for ERC?
Answer: Eligible independent schools may take the credits on their final Form 941 or amend previous Forms 941.
Question 3: In 2020, our school was forced to shut down due to mandatory government shutdowns. As a result, operations were fully or partially suspended. This limited our ability to charge for programs such as food service, and after-school activities. However, in 2021, we put our own restrictions in place as our state did not have official restrictions on capacity. Are we still eligible for ERC?
Answer: It depends. The independent school needs to assess if they qualified for the gross receipts test OR partial shutdown test. For the partial shutdown test, the independent school will need to assess the level of effect any federal, state or local regulations impacted their business through 2021 to substantiate partial suspension of operations. The independent school can also assess eligibility through the reduction in gross receipts method. For 2021, the reduction in gross receipts required is 20% in the quarter, compared to the same calendar quarter in 2019. For 2021, businesses may also choose to compare gross receipts in the immediately preceding quarter (i.e., for Q1 2021, qualification can be determined based on comparing Q4 2020 to Q4 2019). (In 2020, a reduction of 50% in a quarter was required to begin qualification under this test.)
Question 4: What is included in gross receipts for an independent school?
Answer: Gross receipts are specifically defined for nonprofit businesses, using the standard in the Internal Revenue Code 6033 which typically reflects amounts reported on the Form 990. Specifically, gross receipts for a nonprofit business are:
- Gross receipts from all operations including activities that constitute unrelated trades or businesses
- Net tuition and other school revenue (auxiliary, afterschool, camp, food service, etc.)
- Gross receipts exclude Paycheck Protection Program revenue
- Investment income, including dividends, rents, and royalties
- Gross proceeds from sales of assets, including investments and real property, with no reduction for cost basis
- The gross amount received/pledged as contributions, gifts, grants, and similar amounts
- Grant and contract revenue
If you have questions about the employee retention credit and how it will impact you, please contact Aaron Diamond, CPA at 774.512.4182, firstname.lastname@example.org; John Buckley, CPA, CGMA, at 774.512.4039, email@example.com; or your AAFCPAs partner.