This is a guest article provided by Cassidy Jakovickas, CPA at MBS Accountancy.
Since being introduced in 2020, the Employee Retention Credit (ERC) has made headlines because of its lucrative potential for eligible employers. However, many churches have overlooked the ERC tax credit due to misconceptions about their eligibility for it. I’ve written previously about how churches may qualify for the ERC, but I wanted to dive into more detail and address common misnomers about the ERC that may prevent churches from exploring their ERC eligibility.
Clarifying Nuances Of The ERC Suspended Operations Test
If you didn’t have a qualifying revenue decline in 2020 and 2021, you could qualify for the ERC if your operations were suspended due to a government order during 2020 and 2021. This eligibility criteria, known as the suspended operations test, has a lot of gray areas that can be misinterpreted without reasonable guidance from a professional.
The Nominal Impact Clause
IRS Notice 2021–20 defines a qualifying shutdown as one that has a “more than nominal impact” on your operations. The nominal impact clause can be defined in one of two ways:
- The gross receipts from the affected portion of your organization comprise 10% or more of your total gross receipts when compared to the same quarter in 2019.
- The service hours performed by employees within that portion of your organization make up at least 10% of your total service hours when compared to the same quarter in 2019.
There are many misnomers surrounding the nominal impact clause that can lead to a false positive for ERC eligibility. For example, many companies have tried to use mask requirements to fulfill the impacted operation’s requirement. However, this scenario is addressed in Answer 18 of IRS Notice 2021–20, where the IRS states that insignificant modifications like masks are not considered to have a nominal impact on business operations.
Additionally, shutdown guidance parameters should be applied on a case-by-case basis since the impact of operational adjustments will vary based on industry and business model.
Was Your Church Able To Continue Comparable Operations During COVID-19?
Suspending operations for less than a full calendar quarter does not mean you are qualified to receive the full ERC amount for that quarter. In IRS Notice 2021–20, the IRS outlines several factors that should be considered when determining whether an employer’s operations were comparable to normal during COVID-19:
- The ability to telework or continue operations from a location other than your normal one.
- The percentage of work that can be completed at a remote location.
- The essentiality of your physical presence to continued operations. If operations cannot continue without your physical presence, you are considered unable to continue comparable operations.
- The amount of time needed to adjust to telework operations. If you took more than two weeks, you may be eligible for “a partial suspension during that transition period.”
The last point about operational adjustments indicates that operational pauses caused by COVID-related modifications will only qualify as a partial suspension during the transition period.
Is That Government Mandate Valid?
When it comes to your ERC eligibility, not all government orders are equal. Many taxpayers and inexperienced ERC professionals have claimed the ERC based on orders from government agencies without the proper jurisdiction. Based on Internal Revenue Code Section 3134, to be considered legitimate for ERC eligibility, a government mandate must be related to COVID-19 limitations on commerce, travel, or gatherings, and come from a government agency with appropriate jurisdiction.
The Center For Disease Control’s (CDC) Guidelines
Question 20 in IRS Notice 2021–20 distinguishes between two employers who suspended operations because of COVID-19. One employer is described as merely “following CDC or DHS” guidelines while the second is described as qualifying because of a mandated suspension. This distinction between a mandated suspension and following CDC guidelines indicates that CDC guidelines cannot be used to justify ERC eligibility unless a local government order required you to follow them.
OSHA Safety Guidelines
The COVID-19 page on the OSHA website explicitly describes OSHA guidelines as “advisory.” The ERC tax credit requires a government mandate, which excludes “advisory” OSHA guidelines. Additionally, OSHA’s “General Duty Clause” cannot be used to validate ERC eligibility. Many business owners point to the OSHA workplace safety requirements under the “General Duty Clause.” But this was created in the 1970s and is not a COVID-19-related mandate, as required by Internal Revenue Code Section 3134.
The answer to Question 12 in IRS Notice 2021–20 states that a company is only considered eligible if it cannot continue operations because it lacks critical materials from a COVID-19-impacted supplier with a qualifying shutdown. Since eligibility in this scenario is based on an inability to obtain materials, it’d be best to document your efforts to find alternative suppliers before relying on this clause as your ERC eligibility basis.
What Is Countable For Qualified Wage Calculations?
After you’ve confirmed your ERC eligibility, you can calculate your qualified wages based on the size of your organization:
- 2020 (100 or fewer employees): You may claim up to 50% of wages paid to working and non-working staff during eligible quarters.
- 2020 (over 100 employees): You can get up to 70% of wages paid to staff who were employed but did not work during eligible quarters.
- 2021 (500 or fewer employees): You can receive up to 70% of wages paid to working and non-working staff during eligible quarters.
- 2021 (over 500 employees): You can get up to 70% of wages paid to non-working staff during eligible quarters.
Note that qualified wages cannot include wages paid to pastors or clergy since they are exempt from federal taxes. Other non-includable wages include emergency paid sick leave (FFCRA), FMLA leave, payroll reimbursed by PPP, and qualified disaster relief funds.
Has The ERC Expired?
Since the Employee Retention Credit is a refundable payroll tax credit, you will need to amend your payroll tax return for your ERC-eligible quarters during 2020 and 2021. However, you must file your Form 941-X within the statute of limitations, which can be found within the instructions provided by the IRS for Form 941-X:
Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later. You may correct underreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date the Form 941 was filed. We call each of these time frames a “period of limitations.” For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.
Based on the above paragraph, the statute of limitations for the ERC is April 15, 2024 for qualifying 2020 quarters and April 15, 2025 for qualifying 2021 quarters.
Get Professional Assistance With The ERC!
Throughout 2020 and 2021, my team and I helped hundreds of companies seize critical disaster relief funding opportunities like the ERC tax credit to sustain their operations. Now that the ERC has ended, we’re helping businesses and organizations retroactively claim this lucrative tax incentive before it expires. If you’d like to learn more about our ERC services, you can visit the MBS Accountancy Corporation website.