Employee Retention Credit: What Your CAA Needs to Know
Are you eligible for the credit?
CAAs and state associations (including 501(c)(3) tax-exempt organizations and 501(c)(4) social welfare organizations) may be eligible to claim the Credit. An employer is eligible for the Credit for a given calendar quarter if it either: (1) fully or partially suspends its operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or (2) experiences a significant decline in gross receipts. Each of these tests is described in detail below.
CAAs that received Payroll Protection Program (PPP) loans are also eligible for the Credit. However, any qualified wages that are counted for purposes of PPP loan forgiveness cannot be claimed for the Credit, and any qualified wages claimed by an employer for the Credit will not qualify for loan forgiveness under the PPP.
(1) Suspension of Operations
To claim the Credit under the suspension of operations test, an employer must have fully or partially suspended operations due to a governmental order directly affecting the employer’s business. Starting January 1, 2021, the Credit is only available to employers when a governmental order is in force. To be considered a partial suspension, the suspension must have “more than a nominal effect” on the employer’s business operations. The Internal Revenue Service (IRS) defines this to mean that a governmental order restricts the operations of any portion of the organization that makes up more than either (A) 10% of the organization’s total gross receipts (as determined using the same calendar quarter in 2019) or (B) 10% of the total number of hours performed by all employees of the organization. IRS Notice 2021-20.
IRS Notice 2021-20 specifically notes that an employer that operates an essential business (and thus remained open when a governmental order was in effect) may still qualify for the Credit under the partial suspension of operations test, if a sufficient portion of the organization’s non-essential operations were suspended by a governmental order. For CAAs, the vast majority of which never shut down during the pandemic, the question is whether government orders forced certain programs or operations to shut down for periods of time such that “more than a nominal” portion of the organization was impacted for a particular calendar quarter. For example, if a governmental order restricts the operations of a CAA’s Weatherization Assistance Program (WAP) during Q2 2020, and WAP constitutes at least 10% of all of the CAA employees’ time or 10% of the CAA’s total gross receipts as compared to Q2 2019, the employer is eligible for the Credit in Q2 2020 even if other programs at the CAA continued to operate unaffected by the shutdown.
(2) Significant Decline in Gross Receipts
Alternatively, employers may claim the Credit under the significant decline in gross receipts test. For a nonprofit, “gross receipts” means the total income the nonprofit receives from all sources during its annual accounting period, without subtracting any costs or expenses.
2020
For 2020, a significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for that calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019. Eligibility for the Credit under the significant decline in gross receipts test ends on the earlier of (1) January 1, 2021, or (2) the first calendar quarter that follows a quarter for which the employer’s 2020 gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.
2021 Q1 through Q3
For 2021, employers must determine separately for each quarter whether they experienced a significant decline in gross receipts. To be eligible for the Credit, gross receipts for the calendar quarter must be less than 80% of its gross receipts for the same quarter in 2019. Alternatively, employers may elect to determine whether they experienced a significant decline in gross receipts using gross receipts from the immediately preceding quarter.
For example, to determine eligibility for the Credit for Q1 2021, an employer would look at gross receipts from either Q1 2019 or Q4 2020 to determine if they had less than 80% of gross receipts as compared to either of those prior quarters. If so, they would be eligible for the Credit.
If an employer qualified for the Credit based on a decline in gross receipts in Q1 2021 (as compared to Q1 2019), that employer automatically qualifies in Q2 2021. If Q1 2021 qualification was based on a Q4 2020 decline in gross receipts, the employer will not automatically qualify for Q2 2021. While the employer may not automatically qualify for Q2 2021, it may still qualify based upon a comparison to either Q2 2019 or Q1 2021.
2021 Q4
While the Credit was initially scheduled to run through the end of 2021, it was ultimately ended on September 30, 2021 for most employers. Certain employers may have reduced payroll deposits in anticipation of receiving the Credit in the fourth quarter, in which case employers must make up for such payroll reductions as the Credit was never received for this quarter.
Only “recovery startup businesses” are eligible for the Credit in Q4 2021, which includes employers that began operating after February 15, 2020 and have under $1 million in average annual gross receipts. CAAs are unlikely to be eligible for the Credit in Q4 2021 unless they started subsidiary or other business ventures after February 15, 2020.
This resource is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Award Number 90ET0482-03. Any opinion, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.