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What Do Federal Agencies Look for When Issuing Grants?

Nonprofits often pursue federal grants to provide services and fulfill their missions, yet the process of applying for government grants can feel intimidating. Generally, there is a short timeline between when a federal agency releases a grant opportunity and when applications are due. That’s why organizations need to have the basic elements in place well in advance.

What are the basic requirements of a federal grant?

Each federal grant has its application and award criteria outlined in the Notice of Funding Opportunity. Audited financial statements are a common requirement, but nonprofits have unique financial reporting needs. For example:

  • Net assets in the Statement of Financial Position generally are broken down into those with and without donor restrictions. These restrictions may be temporary or permanent and have limitations on time or purpose. The net assets section should list sources of funds broken down into three areas: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.
  • Your organization’s Statement of Activities breaks out sources of gross receipts to show where they came from, such as fundraising, grants, donations, etc.
  • Nonprofits issue a unique financial statement: the Statement of Functional Expenses. This statement breaks out expenses into categories such as programs, fundraising, and administrative costs to show readers of the financial statement — including potential grantors — how your organization balances spending on programs and overhead.
  • The footnotes on your nonprofit’s financial statements are just as important as the individual statements because they provide deeper context into the financial statement numbers.

Working with an audit firm specializing in nonprofit financial reporting can ensure your organization appropriately tracks revenues and expenses, prepares accurate and thorough financial statements, and demonstrates to grantors that your organization is accountable for all funding sources.

Financial transparency and accountability

Federal grants come from taxpayers’ money, and each federal agency is required to see those resources are used appropriately. That’s why government agencies require transparency and accountability from recipients of awards.

Financial transparency and sound business/board practices start long before the grant application process. In addition to having audited financial statements, nonprofits should:

  • Be clear about how the funds will be used. Thoroughly document the problem you intend to address with the grant funds in the grant application. Support your request with facts and figures documenting the issue and how any funds awarded will help address it. Propose specific, measurable results you plan to achieve, including how many people will be impacted and in what way. Provide a proposed timeframe and method to measure results.
  • Demonstrate sound governance. Maintain minutes for all meetings of the board and committees that act on behalf of your board. Some of the activities to document in the minutes include:
    • Annually reviewing written conflict-of-interest policies and disclosure statements.
    • Approving your executive director/CEO’s compensation and benefits and how your board determined the compensation is appropriate
    • Reviewing annual financial statements and IRS Form 990 before they are filed
    • Approving the annual budget
  • Demonstrate sound business practices. Your organization should have a written document retention and destruction policy and travel expense reimbursement policy.
  • Document internal controls. Ensure your organization’s financial management systems include adequate internal controls, including proper segregation of duties to safeguard resources.
  • Demonstrate accountability. Publish your organization’s most recently filed federal tax return and list each member of the board of directors on your website.
  • Demonstrate responsible borrowing. Like businesses, nonprofits sometimes need to take out loans to make capital investments, even out cash flow and take advantage of opportunities. However, it’s important to document how you will use the funds and have a realistic repayment plan.

Government grant applications can be demanding to prepare, and competition is fierce. However, if your organization is new to seeking federal grants, you can often receive free training and technical assistance from the federal agency issuing the grant. Need help preparing, organizing, or reviewing any of the documents or strategies listed above? Call our team today!

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Congress Has Approved the Infrastructure Bill: What’s In It For You?

The long-awaited $1 trillion Infrastructure Investment and Jobs Act (IIJA) received the U.S. House of Representatives’ approval Friday, November 5, 2021, to provide funding for improvements to highways, bridges, and other road safety measures. The bill also offers plans to reconnect communities previously divided by highway building and expand national broadband networks.

According to White House projections, investments outlined in the infrastructure act will add approximately 2 million jobs per year over the next decade.

A portion of the original bill was held back, and there were not as many tax provisions as originally expected, which could mean additional changes may be coming in a fiscal year 2022 budget reconciliation.

What’s in the $1T Infrastructure Act?

There are several key tax provisions found in the IIJA.

  • Employee Retention Credit: The infrastructure act ends the employee retention credit (ERC) early, repealing the fourth-quarter extension. Wages paid after September 30, 2021, are ineligible for the credit unless paid by an eligible recovery startup business.
  • Crypto asset Reporting: The IIJA clearly defines the terms broker and digital assets to clarify capital gains or losses from cryptocurrency. It also provides new reporting requirements for crypt currency exchanges. The following information must be reported to the IRS and customers effective January 1, 2023:
    • Name, address, and phone number of each customer,
    • Gross proceeds from any sale of digital assets, and
    • Capital gains or losses (short-term or long-term)
  • Disaster relief: The IIJA modifies the automatic extension of specific deadlines for taxpayers impacted by federally declared disasters. It amends the definition of a disaster area as “an area in which a major disaster for which the President provides financial assistance under section 408 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5174) occurs.”
  • Other Tax Provisions
    • Extension of highway-related taxes
    • Extension and modification of superfund excise taxes
    • Allowance of private activity bonds for qualified broadband projects and carbon dioxide capture facilities

What Else is Included?

Here’s a breakdown of what’s included:

  • Roads and bridges: $110 billion to repair the nation’s highways, bridges, and roads and invest in other transportation programs.
  • Public transit: $39 billion to expand and modernize transportation systems, improve access for people with disabilities, provide dollars to state and local governments to purchase zero-emission buses, and repair buses, rail cars, and train tracks.
  • Passenger and freight rail: $66 billion to reduce Amtrak’s maintenance backlog and improve rail service routes, including the Northeast Corridor.
  • Electric vehicles: $7.5 billion for electric vehicle charging stations, $5 billion to purchase electric buses, and $2.5 billion for ferries.
  • Modernizing the electric grid: $65 billion to protect against power outages.
  • Airports: $25 billion to improve runways, gates, taxiways, terminals, and air traffic control towers.
  • Water and wastewater: $55 billion to spend on water and wastewater infrastructure, including replacing lead pipes and addressing water contamination.
  • Broadband internet: $65 billion to bolster the country’s broadband infrastructure, including ensuring every American has access to high-speed internet. Additionally, one in four households is expected to become eligible for a $30 per month subsidy to pay for internet access.
  • Great Lakes Restoration Initiative: $1 billion for the cleanup of rivers and lakes, including a special target of areas with heavy industrial pollution.
  • Road safety: $11 billion for transportation safety programs.

Where does the Build Back Better plan stand?

The BBB is set to be the largest social policy bill brought to a vote in recent years, bringing funding to address issues such as climate change, health, education, and paid family and medical leave.

House leaders hope to pass the Build Back Better plan later when they return November 15 after a weeklong recess.

The Build Back Better plan and IIJA have many intricate details. We’ll continue to provide more information as it becomes available.

Funding from this bill is anticipated to impact small governments and many nonprofit organizations. It is projected that the number of Federal audits under the Uniform Guidance will increase dramatically. If you find that your organization will be receiving this funding be sure to reach out to our team of professionals who can assist you with implementing the Federal compliance requirements regarding appropriate tracking of these funds.

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The new requirements for in-kind gifts reporting for nonprofits

Nonprofits remain one of the most important aspects in the front lines of helping communities in need. During times of crisis, such as the COVID-19 pandemic, many may find themselves with an influx in donations and in-kind gifts. Remember to use the new reporting requirements outlined by the Financial Accounting Standards Board (FASB) in accounting standards update No. 2020-07 released in September 2020.

Check out what reporting changes must be made by nonprofits and when they should go into effect.

What is considered an in-kind gift?

When nonprofits receive non-financial gifts from donors, they are more than likely considered a in-kind gifts. The FASB Master Glossary defines these as gifts of nonfinancial assets or fixed assets (e.g.. buildings, land, equipment), the use of fixed assets or utilities, materials and supplies, unconditional promises of assets, and intangible assets and services.

In-kind gifts allow nonprofits to focus more on their mission and the communities they serve while building relationships with businesses and individuals who may choose to or need to contribute in a non-financial manner.

When will the reporting requirements go into effect?

According to the accounting standards update No. 2020-07 by the FASB, nonprofits must include the new reporting requirements on annual financial reports for fiscal years beginning after June 15, 2021. If your organization follows a nontraditional fiscal year, you may already be tracking in-kind gifts in more detail. If you follow the calendar year, your organization will need to implement new procedures for recording in-kind gifts in the new year.

What are the new reporting requirements?

Nonprofits are now, or will soon be, depending on their fiscal year, required to report in-kind gifts as a separate line item on the statement of activities. This should be separate from cash or other financial assets.

When recording in-kind gifts throughout the year, keep the following reporting needs in mind. If you’re tracking these correctly along the way, creating the updated financial reports should be less daunting.

Statement of Activities reporting requirements:

  • In-kind gifts as a separate line item and further broken down by category to show the type of non-financial assets.

Disclosures for in-kind gifts:

  • Nonprofits must disclose the following for each category type:
    • If the gifts were monetized or used during the reporting period and how they or the money was used.
    • The policies in place for monetizing in-kind gifts.
    • A description of any donor-imposed restrictions, if applicable.
    • How the nonprofit arrived at the valuation for the in-kind gifts received.
    • Principal (or most advantageous) market used to calculate the fair market valuations.

 

Other reminders for reporting in-kind gifts

In addition to the new requirements, nonprofit organizations should be mindful of generally accepted accounting practices for in-kind gifts. When receiving in-kind gifts, recognize them as income in the period they were pledged or committed to your organization, using fair market value at the time of the gift. This does not apply if there are certain stipulations that dictate how the contribution should be used or if it is part of a conditional transaction.

Nonprofits can also act as an agent if the donor specifies the in-kind gift has another beneficiary. This is because the donor hasn’t given up their “variance power.” If contributed services are donated, they only need to be recorded in financial statements if the service “creates or enhances non-financial assets” or the service “requires specialized skills provided by individuals with those skills that would typically need to be purchased if they were not previously donated.” Examples of these types of services include accounting, medical care, legal services, and construction work.

For clarification on in-kind gifts or assistance establishing a method for tracking and reporting these contributions, reach out to our team of knowledgeable professionals today.

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IRS releases W-2 reporting requirements for qualified leave in 2021

The IRS recently issued Notice 2021-53, providing guidance on reporting qualified leave and sick wages to employees. Qualified sick and leave wages are those that are defined by the Families First Coronavirus Response Act (FFCRA), which was amended by the COVID-Related Tax Relief Act of 2020 and the American Rescue Plan Act of 2021

How are wages reported?

According to the notice, the wages must be reported to employees with their W-2. Employers can choose to place the wages either on Form W-2, Box 14, or by providing documentation delivered with the Form W-2. The notice provides sample language employers may use if providing a separate statement.

The IRS also noted that self-employed individuals can determine what, if any, sick and family leave wages are qualified for tax credits. This is a follow-up to Notice 2020-54 released in 2020 regarding reporting of qualified sick and family leave wages paid in 2020.

What are qualified wages?

The FFCRA defines qualified wages as those paid for sick or family leave related to COVID-19.

Qualified wages can be paid to employees who are:

  1. Subject to state, local, or federal quarantine.
  2. Advised by a healthcare provider to self-quarantine.
  3. Experiencing COVID-19 symptoms and seeking a medical diagnosis.
  4. Caring for someone who is self-quarantining in accordance to bullets 1 and 2 above.
  5. Experiencing a substantially similar condition as specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
  6. Caring for a child or dependent whose school or place of care is closed or unavailable related to COVID-19.

What are the limits on wages paid?

The FFCRA allows for full-time employees to be paid up to 80 hours (two weeks) worth of paid leave for the reasons mentioned above and for part-time employees to receive paid wages for up to two weeks equal to their normal weekly scheduled hours.

The paid leave is extended to equal up to 12 weeks of leave at their normally scheduled work period hours for those providing care because of COVID-related childcare and school closures.

Read more on the FFCRA requirements here, or contact our team of experts to discuss how to determine which leave hours are qualified and how to track them for Form W-2 reporting purposes.

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How nonprofits can help when disaster strikes

When disaster strikes a region, it often flips a switch in humanity, triggering their need to help in ways that everyday struggles don’t. We saw it with Hurricane Katrina years ago and again with Hurricane Ida this year. While nonprofits, businesses, and individuals alike wish to do something to help those affected, it’s important to be informed on how to best contribute, so they don’t fall victim to scams or tax problems down the road.

Temporarily shifting the nonprofit’s focus

If you’ve wondered whether you can temporarily shift your nonprofit’s focus to help with disaster relief, the answer is yes, but there are some limitations. When originally filing for tax-exempt status with the IRS, your organization provided the purpose or focus of your nonprofit.

Disaster relief efforts allow for some leeway in that purpose. However, you’ll want to protect your organization against accusations of violating the prohibition for private benefit in the tax code and disclose any change in focus on the annual Form 990 filing. Keep very thorough records that include:

  • Dates of assistance
  • Assistance provided
  • Purpose of the assistance
  • Name and address of recipients
  • How recipient(s) was selected for assistance
  • Who is selecting the individuals receiving assistance
  • Any personal relationships between members of your nonprofit and recipients.

If you take these precautions and consult with your trusted tax advisor beforehand, providing disaster relief instead of your core organizational focus can be achieved.

Struggling nonprofits and partners

Nonprofits and their partners are not immune to hard times and could be struggling through a natural disaster while they’re trying to provide assistance. If your nonprofit finds some of your partnership organizations have been affected, there is still a way to help.

For example, there are often preapproved grants at the local level that help charitable nonprofits provide disaster relief. As part of your disaster recovery planning, make sure to review what grant options are available in your area. Doing so will allow you to apply for assistance more quickly if disaster strikes.

Other considerations nonprofits should be aware of

When nonprofits and individuals jump into action, they can hit several roadblocks along the way. While collecting and donating food, clothing, and supplies seems like an easy way to help, it can be met with logistical problems. First, collections take time. Second, transportation of these items is often expensive and often waylaid by restrictions accessing affected areas until it’s safe to do so.

Monetary donations to nonprofit organizations with their boots already on the ground can be implemented more quickly, and they’re often more aware of exactly what the community they’re serving needs. Reach out to nonprofits in the area to discuss how your organization can help them help the community.

There may be times when those who are impacted cannot communicate with your nonprofit team due to language barriers. Having team members who speak secondary languages can help overcome those barriers to provide assistance for those community members. Another option would be contracting with a translating service that offers remote capabilities.

In addition, the IRS often announces disaster relief for individuals and businesses who may be impacted in the form of extending deadlines for tax filings. Keep an eye out for those announcements, should you need them.

How to advise individuals looking to help

There are several resources available to consumers and businesses alike to help them determine if the organization they’re donating to is legitimate. Typically, nonprofits working on disaster relief efforts are registered on the Center for Disaster Philanthropy. In addition, they can use the IRS Tax-Exempt Organization Search tool to confirm their donations are going to a registered nonprofit.

Our team of professionals is here to help you navigate how to shift to disaster relief efforts. Give us a call with any questions you have.

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Managing Partner’s Message – September 2021

Back to school!! Even though the Pandemic is not fully behind us the future is still ahead and we must all respond accordingly. For our children and those working to educate them it means a tenuous return to the classroom. For the past several months we have learned much of what the schools have been doing to ready their buildings and staff for being back in the classroom full time. With the increased need to add physical barriers, intense cleaning, and additional technology, our school clients have been working tirelessly to be as prepared as possible. Much of the funding for these necessities has been with Federal dollars, posing additional challenges to requirements for how the money should be spent. We have been helping our government, school, and nonprofit clients navigate the complexities of accounting for Federal funding. We are now entering the time when audits will determine compliance in accordance with the most up to date regulations. In preparation for the fiscal year 20-21 audit cycles, we once again held our annual school conference. Our Partners met virtually with our clients and shared important accounting and auditing updates to ensure there would be no “surprises” when audit season arrived. In a period of time when change is the normal and fear of the unknown is more prevalent than ever, we take seriously our role in making sure our clients are up to date. Our Partners have also been very busy over the past few months expanding their reach to other groups. Jeff Kowalczyk and Edmund Fosu-Laryea were both featured speakers at the PICPA annual school conference. Jeff also presented at PASBO and for the PICPA local government/nonprofit conferences. Our Partner Steve Kutsuflakis has been working closely with a Delaware private school where he serves on the Investment committee – helping the organization make critical decisions regarding funding and investment of funds while ensuring the school remains on track to meet the needs of their student population. I have been serving on the Covid grants review committee in conjunction with the Delaware Community Foundation. It is encouraging to witness all of the work being accomplished through mission driven individuals and organizations. It serves as a continued reminder that we will collectively move beyond the pandemic. We are busy planning two important events for this fall. Our 4th annual nonprofit story telling event is scheduled for November 2nd. We have a tremendous line-up for this popular event. We will be virtual once again this year but are hopeful that we will return in person in 2022. We have a diverse group of professionals lined up including representatives from Your Part-time Controller, Young, Conaway, Stargatt & Taylor, WSFS, AB Bernstein and Delaware Business Times. Our second event will be a webinar for the benefit of the local government community. We are working to put together an agenda that will bring current important information to this all-important sector of our communities. We are also excited to announce that after more than 40 years in the same location our offices are moving! We are scheduled to be in our new offices by the end of the year and we are looking forward to our new open space designed to be state of the art and welcoming. As we work on the design and amenities, we have our staff as well as our clients in mind. We will be sharing more as our move gets closer. In the meantime, we encourage our clients – existing and potential – to reach out to us. We are excited to be your trusted advisors and to do all that we can to assist as you navigate your financial obstacles.

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Risk management tasks to complete before returning to the workplace

In many parts of the country, nonprofit organizations are resuming normal operations and bringing staff back into the office. The logistical hurdles of making this happen aren’t the only thing nonprofits should focus on. Shifting how your organization operates is the best time to review potential risks for your organization. Below, we’ll discuss what this could look like for your nonprofit.

Why is reviewing policies and procedures important?

At the beginning of the pandemic, many businesses were shut down or forced to operate remotely as the world was faced with unprecedented wide-spread health concerns. Because of this, many nonprofits made adjustments on the fly so their employees and volunteers could continue to work, but at a remote location. What may have worked in a pinch may not be what’s best for your organization a year or more later.

In addition, all organizations, nonprofits included, are continuously evolving as new technology is launched or new problems emerge. New employees can find efficiencies that were potentially overlooked before because they’re coming with a fresh view. All of these are why regular review of policies, procedures, operations, and contracts is an important step for nonprofit organizations.

 

Items to consider during the nonprofit review:

Below are some tasks to get your started on your risk management review of your nonprofit’s operations. Consider this a starting point and add anything else that could be important to your organization.

  • Review contracts and agreements. Were they negotiated pre-pandemic or early pandemic? Consider if the contract works for your organizational needs and how you operate. If not, consider renegotiating. Some contracts to consider including fundraising agreements, property or equipment leases, and even insurance policies.
  • Check over vendors and partners. Look at donor management software, board management software, and outsourced duties like human resources, payroll, accounting, administration, marketing, and IT. If these are no longer meeting your needs, talk about changing the contract or searching for new partnerships.
  • Establish return to work policies with human resources. Have a plan in place whether you’re going to ask team members to work full-time from the office, split time between office and home, or allow more flexibility in either working remote as needed or even 100 percent of the time. Also consider what liabilities you are taking on bringing the team back into the office and what your safety protocols look like.
  • Keep an eye on relief funding requirements. If your nonprofit accepted relief funds, like many others have, make sure you are aware of any stipulations attached and whether your nonprofit organization has met those rules or not.
  • Inspect internal policies. Has your nonprofit allowed internal policies or organizational bylaws slide during the pandemic? The most common concerns across the industry have been conflicts of interest and segregation of duties. It’s possible the policies need a refresh to work for the organization, or employee training needs to be completed on existing policies. If your Board decides to start enforcing rules you may have been lax about over the last eighteen months, consider giving employees a grace period before they’re expected to fully adhere to the written rules.

Taking a risk management approach to these reviews can help your nonprofit organization by limiting potential fraud, lawsuits, and other risks with a monetary penalty. Our team is available to help you review any financial concerns or to conduct financial audits. Give us a call to discuss your needs today.

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Key Performance Indicators Nonprofit Leaders Should Track

By Jeffrey A. Kowalczyk, CPA, CFE, CGAP

Key performance indicators nonprofit leaders should track

At the beginning of the pandemic, many nonprofit organizations saw a sharp decline in donations and participation. Amidst the uncertainty, donations dropped by up to 17 percent in April, May, and June. While the downward trend eventually reversed, and donations ended the year two percent above 2019 numbers, the decline brought to light the need for nonprofits to maintain a close eye on key performance indicators (KPIs).

KPIs are metrics leaders have prioritized, are updated regularly, and serve two functions. First, they provide nonprofit leaders the opportunity to keep an eye on the health of the organization. Second, they can be used to help new and existing donors decide where their finite resources are best contributed. Donors want to support a cause they care about, but they also want to know how their funds are being used.

This article will explore which KPIs are essential to track and how to calculate them.

Track these KPI’s

There is a seemingly limitless supply of ratios you can track when it comes to finances; however, the following ratios are often indicators of nonprofit organization health and financial impact.

  • Current ratio: This ratio allows organizations to see their ability to pay short-term organizations. Experts recommend this is at least 1:1  for most organizations.
    • Calculation: current assets/current liabilities
  • Liquidity: Your liquidity ratio allows leaders to understand how flexible they can be in a crisis or if a new opportunity emerges. Much like personal budgeting, experts recommend having 3-6 months in cash reserves.
    • Calculation: cash on hand/average monthly expenses
  • Administrative expenses: Tracking the percent of funds that go towards administrative costs will allow you to decide if you’re spending too much on administrative costs. This should be below 20 percent.
    • Calculation: management, administrative, and general expenses/total expenses
  • Program efficiency: On the other side of administrative expenses, program efficiency lets leaders and donors know how much of their donation is going toward actual charitable programs. Experts recommend staying around 75 percent.
    • Calculation: program service expenses/total expenses
  • Fundraising expenses: Fundraising is necessary to bring donations into a nonprofit, but it should not cost more than the funds you bring in. There are two ways nonprofits generally report fundraising expenses:
    • 1. Fundraising costs unrelated to special fundraising events. This is reported on the statement of functional expenses as fundraising expenses. This figure is generally less than 20 cents per contribution dollar.
    • 2. Fundraising costs directly related to special fundraising events. This is reported as a contra-revenue and will often be higher than 20 percent of event revenues, depending on the nature of the event. Organizations should perform year-over-year comparisons of event revenues to event expenses to ensure events continue to serve the organization’s needs.
  • Recurring unrestricted revenues: Knowing the total amount of recurring income allows a nonprofit organization to better budget each year.
    • Total of any recurring income, not including one-time grants, gifts, and contributions.
  • Liabilities to assets: When used correctly, debt can be helpful. However, too much debt can eventually catch up with an organization and cause problems. Debt should not be more than 50 percent of your assets.
    • Calculation: total liabilities/total assets
  • Full-cost coverage: If the building your organization owns needs repairs or if any equipment needed replacing, is your organization prepared for the cost? Budgeting for the depreciation of the assets and payment of debt principal allows organizations to have cash on hand when equipment needs replaced.
    • Calculation: add in the cost of depreciation, payments to debt principal, and a surplus when calculating annual budgets.

Knowing you are on the right track

In addition to tracking the KPI’s for your nonprofit organization, having a benchmark can help leaders know they are on the right track. Start by monitoring against your previous years’ data. This will allow you to see when you are growing or need to work harder in a specific area. Second, identify three to five comparable nonprofit organizations and track your KPI’s against theirs regularly. Form 990 for nonprofit organizations is public record, which means you can pull their reports every year and compare your organization’s performance to theirs.

Key performance indicators are an excellent way for business leaders of all kinds, especially nonprofit organizations, to monitor the health of their organization and determine what areas need more focus. We can help your nonprofit establish, understand, and track its KPIs. Give us a call today!

Also read our blog article 

About Barbacane, Thornton &

Company LLP

Barbacane, Thornton & Company LLP is a highly regarded, regional
certified public accounting and consulting firm specializing in auditing and
tax services for government agencies and nonprofits. For more information about
Barbacane, Thornton & Company LLP, please call (302) 478-8940 or visit
btcpa.com

 

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What You Need to Know About the Employee Retention Credit

What You Need to Know About the Employee Retention Credit

By Steven Kutsuflakis CPA

What You Need to Know About the Employee Retention Credit                                    

The Employee Retention Credit (“ERC”) was created to help employers recover from the government mandated COVID-19 related shutdowns by allowing employers that pay qualified wages including health plan expenses to receive a refundable tax credit of up to $5,000 per employee in 2020 and $28,000 per employee in 2021. 

The ERC was originally enacted under the March 2020 Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and has undergone a series of revisions with the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“the Relief Act”) enacted in December 2020 and later the American Rescue Plan Act of 2021 (“the American Rescue Plan Act”) enacted in March 2021.

Who is Eligible?

Employers, including tax-exempt entities, are eligible for the credit if they were carrying on a trade or business during the calendar quarter for which the credit is determined and experience either:

  1. the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
  2. a significant decline in gross receipts when compared to the same quarters in 2019. For the 2021 quarters, a significant decline is defined as less than 80% of gross receipts for the same quarter in 2019. For the 2020 quarters, a significant decline is defined as less than 80% of gross receipts for the same quarter in 2019.

The ERC is not available to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing (governmental entity) with some exceptions.

Qualified Wages

The definition of qualified wages depends on number of employees during 2019. 

If an employer averaged more than 100 full-time employees during 2019 (2020 small eligible employers), qualified wages are generally those wages, including certain health care costs, paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If an employer averaged 100 or fewer full-time employees during 2019 (2020 large eligible employers), qualified wages are those wages, including health care costs, paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.

The Relief Act provides that large eligible employers are eligible employers for which the average number of full-time employees during 2019 was greater than 500 (2021 large eligible employees).   The Relief Act provides that small eligible employers are eligible employers for which the average number of full-time employees during 2019 was not greater than 500 (2021 small eligible employers).

Exclusion from Qualified Wages

An employer that is eligible for the ERC can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.

Claiming the Credit

As mentioned earlier the ERC is up to $5,000 per employee in 2020 (50% of qualified wages up to $10,000 per employee for all quarters) and $28,000 per employee in 2021 (70% of qualified wages up to $10,000 per employee for each quarter in 2021). 

There are various rules related to claiming the ERC, including circumstances under which an eligible employer may request an advance payment of the ERC. 

Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

To claim the ERC, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers.  The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures.

In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, considering any reduction for deposits in anticipation of the paid sick and family leave credit.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

Guidance for claiming the ERC can be found at www.irs.gov under IRS Notices 2021-20 and 2021-23. 

If you have questions or would like additional assistance in determining whether this funding is available to your Organization, please contact Steven N. Kutsuflakis, CPA, Partner at skutsuflakis@btcpa.com.

About Barbacane, Thornton &

Company LLP

Barbacane, Thornton & Company LLP is a highly regarded, regional
certified public accounting and consulting firm specializing in auditing and
tax services for government agencies and nonprofits. For more information about
Barbacane, Thornton & Company LLP, please call (302) 478-8940 or visit
btcpa.com

 

Read more

Managing Partner’s Message – February 2021

Pamela W. Baker CPA Managing Partner

Who does not love a snowy day? When we were growing up and in school a snow day meant staying home, sledding, hot cocoa, and no homework. Five years ago, it meant major disruption to our schedules and workflows and the resulting crush to make up for time lost at client offices to ensure that work got completed to meet deadlines. This time last year it meant that staff would be able to work from home with little disruption as long as they had thought ahead in order to obtain information from clients. This year our physical office actually closed on the snow day with everyone – even our administrative staff – working effectively at home. A snow day means little change to the majority of our staff who, since last March, have fine tuned the art of being able to work remotely. We still “see” one another – but in a virtual manner with the use of technology. The only difference today is a pretty scenery outside with no hassle to shovel ourselves out.

Just like snow days – so much has changed for everyone. Over the past nine months we have experienced numerous firsts:

  1. A remote work environment
  2. Interviewing potential new hires on Zoom
  3. On-boarding staff remotely
  4. Attending board meetings through technology
  5. Establishing work groups via Microsoft teams
  6. Implementing electronic signature capabilities
  7. Moving administrative functions into a paperless environment
  8. Hosting virtual happy hours
  9. Our first virtual holiday party
  10. Hosting virtual conferences for schools and nonprofits
  11. Presenting at conferences via technology

Some of our firsts have been exciting and new. Others were a little more challenging, but we are so fortunate to have a team of dedicated and highly skilled individuals who did not give in or give up. We also need to pause to give a huge shout out to our clients. Everyone knows that for many people during the pandemic there were lost jobs, decreased sales, unemployment. Those are all real issues. For our clients – the nonprofits and schools and governments – there was never a time when they were not needed more. We have been witness to the dedication and hard work of those that needed to step up. The nonprofit sector has experienced lost revenue from cancelled fundraisers while the need for services has significantly increased. Our public schools have struggled to protect faculty and children while continuing to provide learning opportunities. Our governments had to continue to work to provide public safety, utilities, roads, and other vital services. We are more grateful than ever to be a niche-based CPA firm specializing in services to these essential workers.

We are hopeful that the year ahead will be a time to put the pandemic in the rear-view mirror. We will be excited to enjoy some of the things that had to be modified because of Covid-19 (like dropping into a client office to say Hi). At the same time, we are energized at what we have learned about each other, our clients, and our firm and we are confident that we will be better for it.

Be on the lookout for more virtual training opportunities, continued great service, and a trusted advisor to be here to meet your needs.

Pamela W. Baker, CPA, CGFM

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