nonprofit

Article Dean Dorton

Written by Kaydee Ruppert, Accounting & Financial Outsourcing Manager at Dean Dorton

The Employee Retention Tax Credit (ERTC), often referenced to as just ERC, is confusing a lot of nonprofit employers. If it’s confusing to you, you’re not alone! There are many nuances to this credit, but the following outline will assist you in navigating and maximizing the opportunity presented by ERTC.

The version of ERTC applicable to 2020 is slightly different than the version adopted for 2021, so they are addressed separately below for greater clarity. Also note that receipt of a Paycheck Protection Program (PPP) loan in either round does NOT prohibit your organization from taking advantage of the ERTC if you otherwise qualify, although any wages used for the ERTC cannot be used for PPP loan forgiveness.

2020 ERTC

Organizations that qualify for ERTC in 2020 may still apply for a refund or tax abatement applicable to the credit.

Determine Qualified Time Period
There are two methods for determining your organization’s qualified time period for 2020 ERTC. If both apply, you should select the one that covers the greater number of days. If neither apply, your organization is not eligible for ERTC for 2020.

If applicable, your organization’s qualified time period matches the dates during which operations in 2020 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The starting date for suspended operations cannot be before March 13, 2020. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.

If applicable, gross receipts for your organization must have significantly declined for one or more quarters in 2020 as compared to 2019. To determine eligibility under this method, first determine total gross receipts by quarter for 2019 and 2020. Divide the 2020 quarter totals by the respective 2019 quarter totals. If the result is less than .5, note the first day of that quarter per the chart below. That is the start of your significant decline in gross receipts. Compare subsequent quarters until you reach a result that is greater than .8. Note the last day of that quarter per the chart below. That is the end date of your significant decline in gross receipts.

Start and End Date for ERTC Sample Periods: 2020 ÷ 2019
Q1 3/13/2020 – 3/31/2020

<.5

 >.5

>.5
Q2 4/1/2020 – 6/30/2020

<.8

 <.5

>.5
Q3 7/1/2020 – 9/30/2020

>.8

 >.8

<.5
Q4 10/1/2020 – 12/31/2020

>.8

 >.8

>.8
Sample Period of Significant Decline in Gross Receipts

3/13/2020 – 9/30/2020

 4/1/2020 – 9/30/2020 7/1/2020 – 12/31/2020

Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 100 or fewer full-time employees in 2019. If your organization averaged more than 100 full-time employees in 2019, be aware that your calculation of qualified wages is different.

Qualified Time Period in 2020 Complete individually for each employee.
Q1 Q2 Q3 Q4  
Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2020. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base.
Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions.
Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act.
The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter.

Calculate Credit and Request Refund or Abatement
Multiply each employee’s qualified wages, by quarter, by 50%. The result is the ERTC applicable to the employee for that quarter until the total year-to-date cumulative amount for the employee reaches $5,000. At that point, no additional credit can be claimed for the individual.

The maximum credit of $5,000 per employee may be realized in just one quarter for some employees, while other employees may not have sufficient qualified wages in the entire qualified time period to reach $5,000. Determine which quarters in 2020 are impacted by the credit for your organization. Then complete IRS Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) for those quarters to claim your refund or abatement.

2021 ERTC

The ERTC is available for qualifying organizations until December 31, 2021 and should be claimed on the quarterly 941 Forms for 2021. These forms are due in April, July, October, and January 2022 so there is still time to determine whether or not you are eligible to include the credit on your return. Once you are confident that your organization is eligible, you may also choose to reduce your employment tax deposits for anticipated credits or submit IRS Form 7200 to request advance payment of employer credits. For the 2021 ERTC, only employers that averaged 500 or fewer full-time employees during 2019 are eligible to request an advance payment of the credit.

Determine Qualified Time Period
There are three methods for determining your organization’s qualified time period that result in two possible time periods for the calculation of the 2021 ERTC. If more than one method applies, you should select the one that covers the greater number of days. If none apply, your organization is not eligible for ERTC for 2021.

If applicable, your organization’s qualified time period matches the dates during which operations in 2021 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.

If applicable, your organization’s gross receipts for one or all of the quarters in 2021 must significantly decline as compared to the same quarters in 2019. To determine eligibility under this method of qualification, first determine total gross receipts for the quarters being considered for 2019 and 2021. Divide the 2021 quarter total by the respective 2019 quarter total. If the result is less than .8 for the quarter, that full quarter is a qualified time period due to a significant decline in gross receipts.

If applicable, your organization’s gross receipts for the quarters immediately preceding the quarters being considered in of 2021 must reflect a significant decline as compared to the same quarters in 2019. A qualified time period of 1/1/2021 – 3/31/2021 requires that gross receipts for the fourth quarter of 2020 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 12/31/2020 by the same quarter in 2019. If the result is less than .8, the first quarter of 2021 is a qualified time period due to a significant decline in gross receipts.

Likewise, a qualified time period of 4/1/2021 – 6/30/2021 requires that gross receipts for the first quarter of 2021 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 3/31/2021 by the same quarter in 2019. If the result is less than .8, the second quarter of 2021 is a qualified time period due to a significant decline in gross receipts. The same methodology then applies to quarters 3 and 4 of 2021.

If this method is used to determine eligibility for a time period, you must elect to do so. Although the method for election has not been clarified yet by the IRS, there is an assumption that Form 941 will be updated to reflect this requirement.

Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 500 or fewer full-time employees in 2019. If your organization averaged more than 500 full-time employees in 2019, be aware that your calculation of qualified wages will be different.

Qualified Time Period in 2021 Complete individually for each employee.
Q1 Q2 Q3 Q4  
Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2021. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base.
Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions.
Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act.
The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter.

Calculate and Report Credit
Multiply each employee’s qualified wages, by quarter, by 70%. The result is the ERTC applicable to the employee for that quarter. The credit is capped at $7,000 per quarter per employee and must be reported on Form 941 for the applicable quarter to receive the respective offset to employment taxes due.

Dean Dorton’s nonprofit team has been closely monitoring the changing relief opportunities available to nonprofit organizations in this time of crisis. We are here to provide consultation, collaboration, or confirmation as needed in your journey back to sustainability.

Click the button below to learn more about Kaydee Ruppert, the newest nonprofit expert to join the Dean Dorton team:

Meet Kaydee Ruppert

For more information on COVID-19 relief efforts, visit our coronavirus relief resources page:

COVID-19 Resources

Do you have questions about House Bill 278? Contact your Dean Dorton advisor, or contact us at:

covid19solutions@deandortonstg.wpenginepowered.com

Article Dean Dorton

Nonprofit organizations rely heavily on volunteers.  When this happens, volunteers can incur significant transportation and other expenses in connection with the performance of their volunteer services. An expense payment may be paid to a volunteer, and the amount can be excluded from the volunteer’s taxable income, similar to a reimbursement for an employee of the organization. The taxation of expense payments is typically determined by the rules for accountable plans or working condition fringe benefits.

An “accountable plan” allows an employer to reimburse employees’ expenses on a tax-free basis if three requirements are met:

  1. There is a sufficient business connection. The reimbursement must be for a legitimate business purpose and cannot be for a personal expense.
  2. The expenses are properly substantiated within a reasonable period of time. The business connection should be appropriately documented and supported. This documentation should include the business purpose, time and place, and the amount.
  3. Excess reimbursements are promptly returned. Any amounts paid in excess of the business purpose should be returned within a reasonable period of time.

The IRS generally defines a reasonable period of time as events that occur in the following list:

  1. The expense is accounted for sufficiently within 60 days after being paid or incurred.
  2. Excess reimbursements are returned within 120 days after the expense is paid or incurred.
  3. Requests are made to employees periodically to obtain appropriate documentation, and the employee complies within 120 days of the request.

If the requirements for an accountable plan are not met, the plan is a non-accountable plan, and the reimbursements would be treated as taxable income.

The IRS has long taken the position that the accountable plan rules apply equally to volunteers if the employer has the right to direct and control how the volunteers perform their services. In other words, individuals providing services without pay under the employer’s direction and control are treated as employees under the accountable plan rules. So long as your volunteers qualify as employees and, your reimbursements meet the requirements of the accountable plan rules, the reimbursements will not be subject to federal tax.

The rules for a “working condition fringe benefit” are similar, allowing an employer to provide property or services to employees on a nontaxable basis so long as:

  1. The expenses would qualify for a business expense deduction if the employees paid for them,
  2. there is a sufficient business connection and,
  3. the business use is appropriately documented.

The business expense deduction (under Internal Revenue Code section 162) requires a profit motive, raising the question of whether volunteers can qualify for the deduction. IRS regulations answer that question by specifically stating that “bona fide volunteers” can use the working condition fringe benefit exclusion if the volunteers don’t have a profit motive. (This rule applies to volunteers for organizations such as yours that are exempt from tax under the tax code or for a governmental entity, as defined in the regulations).

For example, the regulations state that an individual is a bona fide volunteer if the total value of the benefits that the volunteer receives in connection with the volunteer’s services is substantially less than the total value of the services that the volunteer provides.

Volunteers that are considered independent contractors instead of employees, because they don’t satisfy the control test for the accountable plan rules, can receive benefits under the working condition fringe benefit rules. That’s because the federal tax exclusion under those rules (unlike the accountable plan rules) also applies to independent contractors.

Article Dean Dorton

  • Extends the $300 ($600 MFJ) above-the-line deduction for those taxpayers not itemizing deductions through 2021 and imposes a penalty for overstating contributions.
  • Extends the one year increased adjusted gross income limits on deductible charitable contributions for individuals who itemize deductions and corporations.

Payroll Protection Loan Program (PPP)

  • Expands the PPP eligibility to include certain qualified 501(c)(6) organizations. Qualified 501(c)(6) organizations are those that do not receive more than 15% of receipts from lobbying, lobbying activities do not compromise more than 15% of total activities of the organization, cost of lobbying did not exceed $1 million during the most recent tax year of the organization ending before 2/15/20, and the organization has fewer than 300 employees;
  • Expands forgivable expenses to include COVID-19 worker personal protective equipment, property damage costs, supplier costs, and technology and human resources expenditures;
  • Simplifies the forgiveness application to a one-page document for loans $150k or less by allowing a certification that they complied with the CARES Act PPP loan provisions;
  • Allows for-profit entities to deduct the expenses paid with loan proceeds and exclude the loan forgiveness from income;
  • Creates a second PPP loan program that is available to employers that
    • Had a 25% or more reduction in gross revenues or receipts between the same quarters in 2019 and 2020, and
    • That had 300 or fewer employees.
    • Maximum loan amount is $2 million.
  • Repeals reduction to loan forgiveness for those borrowers who also received an Economic Injury Disaster Loan (EIDL).

EIDL

Provides for a new round of EIDL funds for employers with 300 fewer employees, and have suffered an economic loss of 30% or more during 2020. Emergency grants are extended through 12/31/21.

Employee Retention Credit

The Act extends the availability of the credit for qualified wages paid through, and including, June 30, 2021, and makes several prospective enhancements. For calendar quarters beginning after December 31, 2020, the Act:

  • Increases the credit percentage from 50% to 70% of qualified wages;
  • Raises the limit on the amount of qualified wages that can be taken into account per employee from $10,000 for all calendar quarters to $10,000 per calendar quarter;
  • Expands eligibility for the credit by reducing the required gross receipts decline from more than 50% to more than 20% of gross receipts for the same calendar quarter in 2019;
  • Allows employers to elect to use prior quarter gross receipts to determine eligibility;
  • Permits certain governmental employers to claim the credit, including 501(c)(1) organizations, colleges and universities, and entities whose principal purpose or function is providing medical or hospital care;
  • Provides that “qualified wages” include only wages paid when an employee is not providing services for employers that averaged more than 500 (increased from 100) full-time employees in 2019;
  • Eliminates the 30-day rule for large employers;
  • Directs Treasury to issue rules allowing employers that averaged 500 or fewer full-time employees during 2019 to elect to receive an advance payment of the credit; and
  • Establishes rules to allow employers who were not in existence for all or part of 2019 to claim the credit.
  • The Act also makes a few changes to the Employee Retention Credit that are retroactive to the effective date of the CARES Act. The Act retroactively;
    • Eliminates the provision in the CARES Act that prohibited employers from claiming the credit if they received a PPP loan. (Note, however, that forgivable payroll costs for purposes of the PPP do not include qualified wages taken into account in determining the Employee Retention Credit); and
    • Clarifies the definition of “gross receipts” for tax-exempt organizations by reference to Internal Revenue Code Section 6033.
    • Provides that group health plan expenses can be considered qualified wages even when no other wages are paid to an employee.

Paid Sick and Family Leave Credit

  • Extends the refundable payroll tax credits through, and including, 3/31/21.
  • Does not extend the requirement to provide paid leave, which expires 12/31/20, but employers now have an opportunity to claim payroll tax credits for those wages.

Shuttered Venue Operators

Provides $15 billion to aid performance venues, independent movies theaters, and cultural institutions.

Do you have questions about the new relief and how it impacts your organization? Contact your Dean Dorton advisor or Allison Carter at alcarter@deandortonstg.wpenginepowered.com.

Article Dean Dorton

In the mission-driven nonprofit world, accounting and financial management can sometimes slip down the priority list. It’s not always easy to allocate budget dollars to back office infrastructure that doesn’t directly support the nonprofit agenda, and it’s even harder to find the time and expertise to make it all work. Consider some of the obstacles:

  • Capital investment for software and hardware
  • Facilities and expert personnel to implement and maintain the system
  • Lengthy deployment cycles
  • Capacity/scalability
  • Reliability/availability

These issues aren’t part of most nonprofit organization’s core competencies. That’s why many nonprofits are increasingly turning to new-generation, cloud-based solutions to automate financial management. Cloud-based financials enable the application vendor to deliver shared, scalable services that any nonprofit agency can access over the Internet using a web browser or mobile device. There’s no need to buy, own, license, understand, manage, or control the underlying hardware, software, or data/networking infrastructure that supports the financial infrastructure. Cloud services are typically delivered on a term-based subscription, eliminating the need for upfront software licensing fees or major purchases of hardware. The result is cost-effective, anytime, anywhere managed access.

While the urge might be to invest in programs rather than technology, it may be wise to calculate how a modest investment in technology can transform operations and ultimately help better managed programs. Cloud technology is much easier to implement than legacy systems of the past, and quickly delivers return on investment.

What do nonprofit financial leaders have to say about their move to the cloud?

Nikki Jones, Controller, Healthcare Businesswomen’s Association

All of our chapters can access our cloud-based financials. We have volunteers working all over the world at all hours of the day and night.  With our system, they access the same world-class financial foundation that many companies use. Our board and chapter leaders have real-time access to reports, registrations, metrics, and analyses. That means we’re constantly on top of our operation and can make strategic decisions faster. For us, the cloud is critical. It’s the only way to go.

James Linday, Vice President and CFO, Great Books Foundation

Cloud financials are absolutely key to running a nonprofit today. Now we can eliminate lots of manual work, be more productive, and eliminate all of those capital investments. This is a predictable, flat operating expense, and we save at least $30,000 a year this way.

In nonprofit financial management, survival depends on predictable costs, a reliable infrastructure, and world-class functionality.

Key Best Practices for Survival:

  • Move financial management to the cloud for optimal accessibility and lower cost
  • Enable global real-time access to financials, reports, and analysis
  • Use cloud architectures to eliminate manual work and improve productivity while providing world-class functionality that far exceeds primitive single-user tools

To learn more about the cloud-based financials we recommend, you can view this short,  on-demand video:

Cloud-based Financials Video

Is an outsourced solution right for you? Learn more about how Dean Dorton’s team of financial experts can take the financial burden off of your shoulders.

Learn More

Article Dean Dorton

A new bill passed Congress in December 2019 with two major impacts on nonprofit organizations. The bill is expected to be signed by the President soon. The changes are considered positive for nonprofit organizations:

  1. The bill repeals new code section 512(a)(7), enacted under the Tax Cuts and Jobs Act (TCJA), to remove the increase to unrelated business income for certain fringe benefits related to qualified transportation expenses, including expenses related to parking facilities. The repeal is retroactive to the original date of enactment under the TCJA. Taxpayers who reported these expenses, incurred after December 31, 2017, as income on Form 990-T may file an amended Form 990-T to claim a refund for any taxes paid related to these fringe benefits. This is a long awaited repeal for the tax-exempt community!
  2. The Act also changes the Internal Revenue Code (IRC) section 4940 private foundation excise tax on net investment income to 1.39%. It eliminates the dual tax rate of 1% or 2% determined based upon the private foundation’s qualifying charitable distributions. The 1.39% rate will be effective for tax years beginning after the date of the Act’s enactment.

Article Dean Dorton

Nonprofit organizations depend on charitable donations to fulfill their mission and achieve maximum impact. That’s great news, since charitable giving in the United States is at an all-time high, surpassing $400 billion in 2017. In the past decade, giving increased by nearly $100 billion. What’s more, contributions increased across all types of givers, especially from individuals, foundations, and corporations. And eight out of nine nonprofit subsectors benefited from increased giving, with religion, education, and human services receiving the most charitable dollars.  

How tax laws are affecting your nonprofit

tax reform and charitable givingThere’s more good news for nonprofits. Tax reform has significantly reduced tax liability for corporations—from 35% to 21%—which will allow them to become even more profitable. Nonprofits will benefit from this in a number of ways, including more earnings to earmark for charitable giving programs. (Charitable dollars receive a 50% write-off on corporate taxes.) Both individual and corporate tax cuts, along with a strong economy, should increase the levels of individual, corporate, and foundation giving.

e-book tax reform & charitable giving: how finance leaders can help sustain nonprofit revenue

What we’re discovering about external impacts

The National Development Institute recently surveyed major donors to determine why they give and how to better engage them. Interestingly, getting a tax write-off was not listed as a motivator. Donors give because they respect the mission, campaigns, and/or leaders of a nonprofit organization. They believe in the good that that charity is doing in the world. It’s clear that nonprofit organizations must focus on giving greater visibility to their story and results, so donors can share in the success of their mission.      

As we mentioned, a strong economy supports giving, and the U.S. economy is doing very well. As long as the economy remains robust, giving from both individuals and corporations should continue to grow. In addition, high stock market levels support increased giving from foundations. The current economic environment offers an excellent opportunity to sustain—and even strengthen—revenue.

Next steps: How can nonprofits sustain and strengthen revenue growth?

To illustrate your organization’s story and engage donors, you’ll need to know exactly what your nonprofit spends, how it performs, and where it makes the greatest impact. A modern fund accounting solution from Sage Intacct automatically tags and tracks your data by key dimensions—giving you instant visibility and insights so you can proactively manage performance, locations, programs, members, and funds. The automation of processes helps you strengthen stewardship, and added efficiency frees up resources for strategic initiatives.

Moving to Sage Intacct will strengthen your story and make your organization’s impact more visible. With modern fund accounting from Sage Intacct, you can:

  • Reduce the month-end close cycle by 50%
  • Reduce hours/days spent manually reporting
  • Improve cash flow with automated grant management and billing
  • Gain instant visibility into the key performance metrics of your organization
  • Show donors the impact of their gifts

Seize the day with Dean Dorton and Sage Intacct

With a strong economy and charitable giving at an all-time high, now is the time to sustain revenue and grow funding. To tell your organization’s story to donors effectively, you must show how the dollars they give turn into results—whether that’s meals served, artists supported, or animals protected. A modern nonprofit financial management solution from Sage Intacct will help you measure and report on key metrics in real-time, thereby increasing visibility into stewardship and outcomes.