Private Schools Should Not Leave ERTC Money on the Table
Qualifying for the Employee Retention Tax Credit (ERTC) is simpler than you might think.
By Michelle Ly, Senior Manager, Assurance Services
The ERTC was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 to help businesses, including nonprofits, avoid layoffs and retain employees during the pandemic. There were three amendments to the ERTC during 2020 and 2021, causing a lot of confusion, and rightfully so. Thankfully, that is no longer the case, and the qualification guidelines are much easier to understand.
How Can My Organization Qualify?
An entity only needs to meet one of the following requirements to qualify. During 2020 or 2021, your organization experienced one of the following events:
- A full or partial shutdown (modified your operations during COVID restrictions) based on a government order.
- A decline in revenue.
During the many phases of COVID, local and state government restrictions were ordered, and private schools were forced to modify their activities and operations. Most private schools modified their operations by teaching online, decreasing the number of days or hours of instruction, decreasing teacher to student ratio (online and in-person), eliminating in-person extracurricular activities and events such as sports, drama, computer lab, tutoring, and 2020 summer enrichment programs were limited or ceased altogether.
For 2020, the decline in gross receipts must be greater than 50% in the comparable quarter in 2019. For 2021, the decline in gross receipts must be greater than 20% in the comparable quarter in 2019.
How Much Is the Credit?
When claiming ERTC for 2020, the employer receives 50% credit on wages of $10,000 per year, so the maximum is $5,000 per employee per year. When claiming the credit for 2021, the employer receives 70% credit on $10,000 of wages per quarter, so the maximum is $7,000 per employee per quarter. One of the amendments was to make ERTC more generous for wages paid in 2021.
Some restrictions apply to “large” employers. When claiming ERTC for 2020, a large employer is defined as having more than 100 full-time equivalent employees (FTEs) in 2019. When claiming ERTC for 2021, a large employer is defined as having more than 500 FTEs in 2019.
If you received Paycheck Protection Program (PPP) loan forgiveness, the wages used for forgiveness will reduce the qualifying wages determining your ERTC. Other reductions to eligible wages include having wages claimed as part of a government grant and credits received from other federal programs.
An Example with 50 FTEs
Your school ceased or modified its operations from March 2020 through June 30, 2021. For the period of mid-March to December 2021, all of your employees made at least $10,000. For 2020, you can claim ERTC of $250,000 ($5,000 per employee/year x 50 FTEs). During the first two quarters of 2021, all 50 employees made at least $10,000 per quarter. For 2021, you can claim ERTC of $700,000 ($7,000/quarter per employee x two quarters x 50 FTEs). That is a total refund of $950,000!
ERTC is a refundable payroll tax credit, which means you do not need to owe income taxes to benefit from this credit. An employer claims the refund by filing amended Quarterly Payroll Tax Returns (Form 941-X). Upon filing, receiving your refund from the IRS could take nine to eighteen months.
Call to Action
As CPAs, we may not charge based on contingencies, so our fees are not predicated on the amount of ERTC you receive. Beware of predatory preparers, which have caused the IRS to refocus their efforts on improper claims, causing penalties for the taxpayer. As with any return we prepare, Marcum will stand behind any IRS audit if your claim is audited. Please reach out for a free consultation to determine if you qualify. The filing deadline is April 15, 2024, to claim ERTC for 2020 and April 15, 2025, to claim ERTC for 2021.