ERC

Well, nothing is ever for certain when it comes to the IRS.  On November 2, 2023, the IRS Director for ERC, John J. McInelly, held a live webinar for trusted tax professionals in which he issued guidelines for withdrawing ERC filings and amending ERC filings, each of which assumed that an ERC filing had been previously made.  

However, he made two announcements that changed how we should think about ERC for those who have not already filed.  First, the IRS is now allowing those who have not previously filed to mail their ERC filings to the IRS now and not wait until the pause is over.  That is a change from the vague guidance that was given before, which indicated they would not want filings to occur again before the pause in processing had ended.  It does not mean they will begin processing your filing before the pause ends. But it does mean they want you to file now – if you believe your filing is accurate and legal. This will put you in the queue faster than waiting to file as previously directed.

Consequently, all who sent us their information for filing during the pause will now be receiving their amended 941-Xs from us for immediate filing.

The second and most important announcement he made was that there are no plans to ask Congress for an extension to the statute of limitations on the ability to file for ERC for 2020. If you have not postmarked your filing by April 15, 2024, you will lose the ability to get a refund forever for the year 2020, even if you are entitled to one.  

Nothing is ever for certain when it comes to the IRS. While the possibility of the statute changing exists, what we were just told is not to count on it. Begin the process of determining if your church can file for ERC and how much the refund would be if you are able to file – and do it now before the statute runs out.

The IRS has received so many Employee Retention Credit (ERC) applications from scammers that they have been overrun with fraudulent submissions. To combat the deluge of illegitimate claims, they have “paused” the receipt of any further applications through the end of the year, effective September 14, 2023.  This does NOT mean they have closed the program.  It does mean they are not going to receive or process any new submissions during this time while they sort through the claims and eliminate the ones that are fraudulent.  Once this work is completed, it should result in quicker processing times to get the checks in the hands of legitimate filers.  

Any submissions already received by the IRS will continue to be processed.  However, they are changing their target of a 90-day turnaround to one of 180 days.  Any submissions already received will be given additional scrutiny to determine if they have a connection to the scammers or appear to be fraudulently filed.  They may ask for additional information before finalizing the processing of the claim for the ERC refund.

For those filers who do not trust the company they used to file and wish to withdraw their filing, there will be procedures for that announced by the IRS later this year.

The IRS published schemes used by scammers to entice churches and business owners to file returns when they should have done more due diligence to determine if they were eligible.  Those characteristics include:

1. Unsolicited calls or advertisements mentioning an “easy application process.”
2. Statements that the promoter or company can determine ERC eligibility within minutes.
3. Large upfront fees to claim the credit.
4. Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
5. Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.

Here is an example of what one of the solicitations looked like. A ministry partner sent this to me, and I turned it over to their ERC Criminal Investigations Unit to investigate.  You will notice some of the claims made by the author of the letter from the list above.

What does the IRS recommend?

“Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.” 

ACS Technologies has partnered with our firm to ensure their ministry partners have access to a trusted tax professional.  James B. Jordan CPA, LLC is a member of the American Institute of Certified Public Accountants (AICPA).  As such, we are bound by its professional ethics and to which we ascribe and adhere.  For more information, please click here.

Frequently Asked Questions (FAQ’s)

• I have not filed or even started the process; should I wait?
  • NO!  That is the wrong approach.  You should immediately engage a trusted tax professional and begin the process of applying.  That way, you’re not in a rush to file when the IRS opens back up.  We have seen it take two days to two weeks for churches to gather the information we need, and depending on your circumstances, it could take several weeks to determine your eligibility.
• Why the urgency to get our information to you?  Two reasons.
  • The filings are by mail only because they involve actual signatures; no electronic filing is available.  You want to get yours in the mail the day they reopen, not start the process of preparing to file!
  • The statute of limitations for being able to file for 2020 ends on April 15, 2024.  Unless Congress acts to extend the statute of limitations, all returns not filed by that date for 2020 will become invalid and will not be processed.  So, don’t lose out on the opportunity to file by delaying your analysis of eligibility, which we do at no charge.
• What do I do if I have already filed and want a second opinion?  Contact us now!  We offer all ACST ministry partners an analysis at no charge.  We will offer our observations of your situation and discuss what your options are.

After your Employee Retention Credit 941-Xs have been processed by the IRS, you will receive one or more refund checks (if the IRS approved them for payment). The next step in the process is depositing and posting your check(s). The first thing to consider when receiving an ERC check is that it is NOT income. ERC checks are tax refunds.

Accordingly, ERC checks should be reflected as such in your financials and not added to your church management system, where they could be misconstrued as a donation or contribution. Deposit the checks in the bank separately from other deposits, making it easier to find them later when bank reconciliation needs to occur.

In a for-profit company, ERC checks would be charged against taxes paid in 2020 and 2021 and require the restating of those years’ financial statements, amending of the tax returns for those years, and the payment of income tax due as a result of not being able to deduct payroll taxes for those years. Thankfully, in the non-profit arena, none of that applies (churches are exempt from paying Federal income tax unless they – rarely – have Unrelated Business Income Tax).

To properly record the check, post it to an account in the non-operating section of the statement of activities.

1. When looking at the chart of accounts, find the section that is titled “Other Income” as a fixed section heading. If one is not there, create one below the 5XXX expense accounts.
2. When selecting the type of account on setup, select the “Other Income” type.
3. Assign an account code in the 6XXXX range. This is assuming you have conformed to the ACS recommended account numbering structure.
   • 1XXXX Assets
   • 2XXXX Liabilities
   • 3XXXX Net Assets
   • 4XXXX Operating Income
   • 5XXXX Operating Expenses
   • 6XXXX Other Income (generally unrealized gains and losses on investments and extraordinary income, such as ERC)
   • 7XXXX Other Expenses (generally investment expenses in brokerage accounts and extraordinary expenses)
   • 8XXXX Donor-designated funds
   • 9XXXX Permanent corpus portion of endowments
4. Name the new 6XXXX account “ERC” so you can identify it on your statement of activities.
5. The debit is the checking account for the deposit, and the credit is to the 6XXXX account.

Alternatively, if your governing body of the church decides to designate the checks for a special purpose, such as benevolence, building repair, capital campaign, etc., then put the amount in the corresponding designated purpose account. The debit is the checking account for the deposit, and the credit is to the restricted account, either 3XXXX or 8XXXX. (If set up properly, 3XXXX is for governing body designations, and 8XXXX is for donor designations, which would not be the appropriate place to put the credit. However, many churches mix the two.)

Some denominations assess annual or monthly fees of their churches based on income. As mentioned, ERC checks are not income; they are a tax refund. The above method should keep the funds out of operating income and be safer from assessment. With a refund of taxes, the church’s governing body can spend the funds on whatever they deem appropriate without any strings attached.

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while sustaining a full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority.

The CARES Act and subsequent acts created ERC because the federal government wanted to provide payroll relief for those employers who kept employees on the payroll during COVID starting March 13, 2020, through September 30, 2021. It is a refund issued by the IRS that allows a church to spend money on whatever they choose or save for the future. It requires complex calculations and is applied for by filing modified payroll tax returns for the period. As a result, each quarter of 2020 and 2021 are analyzed from payroll data to determine the refund amount. Subsequently, a check is issued for each quarter if it is approved.

History

ERC is not new. It was used to support the recovery efforts of employers who experienced losses from Hurricane Katrina in 2005. It was repealed by Congress in 2018 for the purposes of Katrina relief.

Current State of ERC

These acts led to the current ERC.

CARES ACT

ERC was initially enacted as a part of the Coronavirus AID Relief and Economic Security Act (CARES Act) on March 27, 2020, making it retroactive to March 13, 2020. In addition to ERC, the CARES Act also included provisions more familiar to the general public, such as the Paycheck Protection Program Act (PPP) and Economic Injury Disaster Loan (EIDL) loans, Families First Coronavirus Response Act (FFCRA) for sick leave, and more. The CARES Act enacted ERC for quarters in 2020.

Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act)

The main provision of the Relief Act was to remove the prohibition of getting a PPP loan and not ERC, or vice versa. Enacted December 27, 2020, businesses could now get ERC even if they received one or both PPP loans available with the caveat that PPP loan amounts used for payroll could not be used in the calculations for ERC relief. It also extended ERC into the first two quarters of 2021.

American Rescue Plan Act of 2021 (ARPA)

ARPA was enacted on March 11, 2021, and further expanded ERC to include the last two quarters of 2021.

Infrastructure Investment and Jobs Act (Infrastructure Act)

The Infrastructure Act was enacted on November 15, 2021, and repealed the general availability of relief in the fourth quarter of 2021. It is still available, but only to Recovery Start-up Businesses and not those that were in existence prior to February 15, 2020.

Common questions about ERC

• Are we eligible if we received one or both PPP loans? YES. The misconception that getting a PPP loan precluded getting ERC is founded in the CARES Act, which initially prohibited receiving both ERC and PPP, but the prohibition was repealed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
• Our revenues did not go down. Do we qualify? YES. There are two different ways to qualify – either a reduction in revenue or a disruption in operations. Most churches qualify due to a disruption in operations.
• Are there limitations on the size of organizations (number of employees) that can get ERC? NO. However, additional calculations are necessary to determine the extent of qualification and the refund amount. We will require payroll information for all of 2019 in addition to that of 2020 and 2021.
• Is there a time limit in which we need to apply? YES. Do not delay. There is both a time limit and a dollar amount authorized by Congress for refunds. If either is reached, you will not have an opportunity to file. The ability to file for ERC begins to decline quarter by quarter on April 15, 2024 and ends on April 15, 2025.

What do we need to do to apply for ERC refunds?

First, you need to confirm your eligibility with the IRS. The IRS website includes the forms to complete, but you may want to hire a tax professional to navigate the process.

While the ERC application process is complex, it’s absolutely worth the investment to recover funds lost during COVID-19 and does not impact a PPP plan if your church has one. If you’d like help with the ERC process, click here.