As of April 17, 2024, the Federal Audit Clearinghouse shows over 213 higher education institutions have claimed the Employee Retention Credit (ERC) for a total of approximately $719 million. While the clock has run out on claiming a 2020 credit, time still remains for 2021.
The ERC is a COVID-era refundable payroll tax credit intended to provide support for small businesses, including both for-profit and not-for-profit organizations, who kept employees on payroll during the pandemic. It’s based on wages paid between March 13, 2020, and December 31, 2021, and worth up to $26,000 per employee.
To qualify, a business must have either:
Eligibility is determined on a quarterly basis during 2020 and 2021. For a 2020 quarter, a qualifying decline in receipts is equal to greater than 50 percent compared to the same quarter in 2019. Subsequent legislation relaxed the rules for 2021, allowing an eligible receipts decline of greater than 20 percent when compared to the corresponding 2019 quarter.
If the decline in receipts test is not met, you can still qualify where you can prove COVID-related governmental orders caused a full or partial suspension of operations. If neither of those two tests are met, a “recovery startup business” that began operations after February 15, 2020, and has average annual gross receipts of $1 million or less can still qualify for a reduced credit in Q3 and Q4 of 2021 – this is the only test that allows a credit in Q4 of 2021.
Once an organization determines it’s eligible, calculation restrictions kick in for larger businesses limiting the amount of eligible wages to only those paid to employees who were not working. This limitation is based upon the 2019 full-time employee (FTE) count, where part-time employees with less than 30 hours per week are not factored in. For a 2020 credit, the FTE threshold is 100; for 2021 the threshold was raised to 500.
Many organizations found ERC’s rollout confusing, with several undefined eligibility terms requiring IRS interpretation of the law and multiple program modifications in subsequent legislation. As a result, some who initially thought they were ineligible later realized they qualified, or vice versa.
The full or partial suspension test remains somewhat vague for most industries, but even the seemingly well-defined gross receipts test also presents challenges. Receipts are inherently different for a not-for-profit organization, and the analysis also differs slightly when compared to a for-profit business. A not-for-profit organization utilizes the definition of gross receipts used in preparation of its Form 990, Return of Organization Exempt from Income Tax.
The definition of gross receipts for these purposes generally follows GAAP revenue recognition, however, Form 990’s definition of gross receipts excludes unrealized gains on investments and includes gross investment sales proceeds. Gross receipts for higher education institutions also generally includes gross tuition charges, as scholarships are reported in expenses on the 990 as opposed to a reduction of revenues as reported in GAAP financial statements.
These nuances in analyzing not-for-profit gross receipts provide challenges for easily determining ERC eligibility, but also make it possible for certain entities to qualify in quarters where they otherwise may not. Many organizations didn’t realize they qualified for the credit until after taking these calculation changes into account. Additionally, although more higher education institutions were eligible for the ERC as a result of expanded eligibility in 2021, the uptake was slower than expected due to the program’s ambiguous rules and numerous changes. Many higher education institutions didn’t evaluate and claim the credit until 2022 or 2023.
While some higher education institutions were able to meet the suspension of operations test, those who did not were unable to qualify for the credit in 2020 either due to the organization’s size or an inability to demonstrate a drop in gross receipts of greater than 50 percent. But program changes for a 2021 credit allowed more private higher education institutions to benefit.
Statistics from the Integrated Postsecondary Education Data System (IPEDS) shows the following demographics and results for institutions who claimed the ERC:
The ERC certainly has had a significant impact on many not-for-profit institutions and helped several endure the pandemic. Unfortunately, despite the credit there have been at least five institutions who have closed or merged with another due to financial challenges. Many others also continue to face financial operating challenges as COVID funding has begun to dwindle.
While opportunity for a 2020 credit has expired, the ERC is still available until April 15, 2025, for those who qualify in 2021. Proposed legislation had aimed to end the program early but failed to clear all congressional hurdles.
If you’d like to explore the ERC, make sure to work with a qualified professional and have all elements of the credit supported in thorough documentation.
Published: 04/22/2024
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