Nonprofit organizations play a crucial role in society by addressing various social, cultural, and environmental issues. However, these organizations often face financial difficulties due to limited funding sources. One way that nonprofits can overcome these challenges is by taking advantage of the employee retention credit (ERC).
The ERC was introduced as part of the CARES Act in response to the COVID-19 pandemic. Initially, the credit was primarily designed to support businesses affected by the economic downturn. However, the Consolidated Appropriations Act expanded and enhanced the credit, allowing eligible nonprofit organizations to benefit as well.
So, how exactly can nonprofits financially benefit from the ERC? Let’s dive into the details.
First and foremost, the ERC provides a significant tax credit to eligible employers for retaining their employees during challenging times. Nonprofits can now claim the credit for the tax years 2020 and 2021, offering considerable relief to organizations struggling with maintaining their workforce.
To be eligible for the ERC, nonprofits must meet certain criteria. Firstly, the organization must have experienced a full or partial suspension of operations due to a government order during the COVID-19 pandemic. Alternatively, if the nonprofit experienced a significant decline in revenue compared to the same quarter in the prior year, they may also qualify for the credit.
The ERC provides a tax credit of up to 50% of qualified wages per eligible employee, with a maximum credit amount of $5,000 per employee for both 2020 and 2021. These wages include not only the regular salary but also the employer’s qualified health plan expenses.
Moreover, the ERC can be claimed retroactively. This means that nonprofits can file amended payroll tax returns for eligible quarters in 2020, allowing them to recoup previously paid taxes and receive refunds. These funds can then be reinvested in crucial mission-related activities or used to cover operational expenses during a time when fundraising may be challenging.
It’s important to note that nonprofits can also take advantage of other relief measures, such as the Paycheck Protection Program (PPP), alongside the ERC. However, there are some restrictions to prevent “double-dipping” benefits from multiple programs.
To maximize the benefits of the ERC, nonprofits should consider working closely with their tax advisors or payroll service providers. These professionals can help navigate the complex eligibility criteria and facilitate the necessary paperwork and documentation required to claim the credit.
Furthermore, nonprofits should also stay updated on any changes or extensions to the ERC. The American Rescue Plan Act, enacted in March 2021, extended the ERC until the end of 2021 and expanded eligibility for recovery startup businesses. Nonprofits should regularly monitor government updates to ensure they are aware of any developments that could further enhance their financial benefits.
In conclusion, the employee retention credit is a valuable opportunity for nonprofit organizations to financially benefit during a challenging period. By maximizing their eligibility and taking advantage of the tax credit, nonprofits can alleviate financial burdens, retain dedicated employees, and continue their essential work in serving communities and fostering positive change.