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What Nonprofits Should Know About Accounting for the Employee Retention Credit

by Grant Lam, Matt Petroski
May 25, 2022

The employee retention credit (ERC) is a form of government assistance established by the Coronavirus Aid, Relief and Economic Security (CARES) Act to help businesses keep staff employed during the COVID-19 pandemic. While the credit brought relief to nonprofit organizations affected by business interruptions, it also has finance teams asking about proper accounting for this credit as they close their fiscal year and prepare their Form 990s. Here are pointers for nonprofits that claim the credit.

Qualifying for the ERC

Nonprofits should account for the ERC as a government grant using the guidance in ASC 958-605, Not-for-Profit Entities: Revenue Recognition. Based on the guidance, the ERC is considered a conditional contribution, which must have both of the following:

  • One or more barriers that must be overcome before a recipient is entitled to the assets transferred or promised
  • A right of return to the provider for assets transferred (or for a reduction, settlement or cancellation of liabilities) or a right of release of the promisor from its obligation to transfer assets (or reduce, settle or cancel liabilities)

There are two ways to qualify for the ERC — a partial or total suspension of your nonprofit’s services due to a government-ordered shutdown or a decline in gross receipts. Determining when the above conditions are met depends on the eligibility route your nonprofit selects. The contribution and related receivable would be recognized in the period your nonprofit overcomes the conditions. In instances where the conditions are met over time, the contribution revenue should be recognized as qualifying payroll costs are incurred and the eligibility requirements are met. An ERC received before the conditions are met should be recognized as a refundable advance.

Nonprofits will also need to prepare and file ERC forms with the government. In most cases, filing the forms is considered an administrative task and is not a barrier to revenue recognition.

Noncompliance With Eligibility Requirements

Some nonprofits interpret ERC eligibility the wrong way and have inadequate documentation for calculating the credit. The rise in ERC noncompliance is partly the result of tax credit companies with aggressive positions on eligibility that approach businesses and assert false claims that every business is eligible for the ERC.

To avoid noncompliance, nonprofits should perform a thorough assessment and maintain documentation surrounding eligibility and the calculation of the ERC. Nonprofits should be prepared for their auditors, and potentially the IRS, to audit the eligibility requirements, conditions of the program and credit calculations. If auditors determine that your organization failed to meet the eligibility requirements, there may be a potential material misstatement. In addition, noncompliance may lead to fines and having to repay amounts received.

Nonprofit recipients of the ERC should begin discussions with auditors early in the audit process to ensure all parties agree with the treatment of the ERC.

Financial Statement Presentation

Below are tips for nonprofits when reporting the ERC on financial statements:

  • Statement of Financial Position – A current receivable should be recognized for the portion of credits that has not been received, but the conditions met. A refundable advance related to the ERC should be classified as a current liability, assuming that the entity will meet the remaining conditions.
  • Statement of Activities – Activity related to the ERC should be reported at their gross amounts. Contribution revenue and payroll taxes should be recognized at gross. Nonprofits should not net ERC grant revenue with related expenses.
  • Disclosures – Nonprofits should disclose a description of the ERC and information about the amounts of the ERC, eligibility requirements and other pertinent information.

Form 990 Presentation

In general, Form 990 reporting follows the book treatment of revenue and expense, with some exceptions. The ERC should follow the book reporting. To the extent that the ERC is treated as a conditional contribution, you can expect the Form 990 to reflect the following:

  • Form 990, Part VIII, Line 1e — Report the amount recognized as contribution revenue as a government grant.
  • Form 990, Schedule A — To the extent that the ERC is reported as a government grant, this should not negatively impact the organization’s public charity status.
  • Form 990, Schedule B — If the amount rises to the level of Schedule B reporting based on the general rule ($5,000 or more) or the special rule (2% of Form 990, Part VIII, Line 1h), a grant from the Internal Revenue Service or Department of Treasury should be included. As a government grant, this treatment should not negatively impact an organization’s public charity calculation.
  • Certain state information or charitable registration reporting requires details of government contributions, so this contribution would need to be reported there as well, if applicable.

For questions or assistance, contact our experts.

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