Nonprofit holiday wish list: Consider these two federal aid programs

‘Tis the season for wishes and good cheer. This is also a time when many organizations look forward to a new year with optimism and hope.   

Like many not-for-profit leaders, your first wish may be for us all to be able to move on from the disruption caused by COVID-19. But don’t let this desire to move forward cause you to overlook some of the remaining opportunities for federally-funded financial assistance. Allow me to highlight two such funding programs that are worthy of serious consideration:  the Employee Retention Credit and the Economic Injury Disaster Loan. 

Employee Retention Credit: The Employee Retention Credit (ERC) was established early in the pandemic as a way to provide cash to employers who, as the name implies, retain employees through the period of COVID disruption. The credit is claimed as a percentage of eligible payroll expenditures on the employer’s quarterly Form 941 payroll tax returns.   

There are a lot of reasons why not-for-profit organizations have not taken advantage of the ERC. Many of these reasons relate to confusion about the program itself and how it has changed over time. Here are the most common incorrect assumptions we see people making, along with the relevant facts: 

• Assumption: As a tax-exempt organization, I can’t use tax credits. Fact: ERC is a credit against payroll taxes and therefore exemption from income tax is irrelevant. Any employer subject to federal payroll tax may be eligible. 
• Assumption: Because my organization received a Paycheck Protection Program (PPP) loan, we are not allowed to claim ERC. Fact: This was originally true, but the program was later changed to allow an employer to participate in both ERC and PPP, retroactive to the start of the pandemic, so long as you do not use the same payroll expenditures for both PPP forgiveness and an ERC claim. 
• Assumption: It’s too late to claim ERC. Fact: The period covered by the ERC program ran from the start of the pandemic through September 30, 2021. However, claims can still be made for up to three years by amending your Form 941 for the applicable calendar quarter(s).   
• Assumption: ERC is complicated and my organization shouldn’t take on the risk of making a claim that might later be found to be incorrect; I don’t have time to figure out the details; I’m apprehensive about an IRS audit of any ERC claim I might make. Fact: It is true that ERC can be complicated in some situations. However, for most employers the complexity is not markedly greater than that of a typical government grant contract. 

We have seen many instances where putting in some effort to understand the ERC has proven fruitful for not-for-profit employers. If your organization hasn’t considered ERC, you don’t have to definitively understand every detail to get started. Start with these four questions as a guide to see if a closer, more detailed look is warranted: 

1. Is your organization part of an aggregated group? 

Aggregation essentially requires that organizations that are under common control are treated as a single employer for the purposes of ERC. Common control in not-for-profit organizations is often evidenced by control over a majority of an organization’s governing board seats, but control can also occur by other means. Regardless of whether your organization has related parties that sound like they might need to be aggregated, proceed to question two. Realize that if you are part of an aggregated group, the remaining questions need to be answered for the entire aggregated group as though the members of the group are a single entity 

2. How many full-time employees did you have in 2019? 

For the purposes of ERC, only count full-time employees. A full-time employee is defined as an employee who worked 130 hours or more in a given calendar month or averaged 30 hours a week or more during the given month. For ERC purposes, identify how many such employees you had in each calendar month of 2019 and then take the average of the 12 months of 2019. Employees who work less than 130 hours in any given month are not included in this calculation at all.  This is a count of full-time employees, not full-time equivalents.   

Employers whose 2019 average full-time employees calculated under this method is less than 500 typically stand to derive the greatest potential benefit from ERC. Employers with over 500 average full-time employees can also benefit from ERC, but the opportunity is generally less significant. 

3. Did you experience an eligible disruption due to COVID-19? 

It seems odd to suggest that any organization did not experience a disruption due to COVID-19. But specific to ERC, there are two ways to demonstrate that your organization experienced a COVID-related disruption that makes your organization eligible to make a claim. An employer can: (a) show that its gross receipts for one or more calendar quarters were reduced as compared to that same calendar quarter from 2019, or (b) document that its operation was subject to a full or partial shut-down due to COVID-related government orders. 

For the gross receipts test, start by using your quarterly recorded income as a proxy for gross receipts. Compare recorded income for each calendar quarter of 2020 and 2021 to that same quarter of 2019. To the extent this comparison shows a reduction of 50% or greater for the second or third calendar quarters of 2020 or a reduction of 20% or greater for the fourth quarter of 2020 or any of the first three calendar quarters of 2021, it is worthwhile to continue looking into the ERC. 

To demonstrate a disruption due to full or partial shut-down due to government order, document the timeline starting when a restrictive government order was issued and what your organization’s response to that order was, including how your ability to do what you do was disrupted. Include the date that the government order “ended” and you were able to resume your activities. Your organization’s period of ERC eligibility is the duration of the documented shut-down period. 

4. Do you have payroll expenditures that have not been used to support the use of other funding sources?   

ERC is claimed as a percentage of eligible payroll costs (which for this purpose includes gross payroll and employer-paid health insurance costs). Have you already “used” payroll expenditures to claim forgiveness on a PPP loan, claim other federal COVID relief funding or to support claims under a non-COVID federal, state or county funding contract? If so, do you have remaining payroll expenditures to utilize in support of an ERC claim? If you have payroll remaining “unused” after other funding claims are satisfied, you should probably move forward with a closer look at ERC. In some cases, it might be worthwhile to move forward with a more detailed consideration of ERC even if much of your payroll expenditures are “spoken for” already. 

Please remember, this is intended to be a high-level, introductory summary of considerations regarding ERC eligibility and the potential opportunity that ERC might present for your organization. If consideration of these questions makes the ERC seem promising for your organization, a closer look is warranted. In many cases, it is prudent to have a conversation with a professional advisor who is familiar with not only these introductory considerations but also all of the ERC program’s details. 

Economic Injury Disaster Loan:  The Economic Injury Disaster Loan (EIDL) program allows for eligible not-for-profit organizations to obtain a 30-year loan at 2.75% for up to $2 million. Based on the most recent information available from the U.S. Small Business Administration (SBA), as of mid-November 2021 there was still over $100 billion available to be lent under the EIDL program. Critically, the program ends on December 31, 2021, so the window to take advantage of this program is closing soon. 

This program was modified in August 2021 to allow for expanded use of EIDL loan proceeds by borrowers. Allowable uses include most ordinary business expenditures as well as repayment of most previously existing debt. In other words, this EIDL program allows for the refinance of up to $2 million of existing debt at a fixed rate of 2.75%.   

EIDL loans are obtained directly from the SBA, not from a bank or credit union. Unlike PPP loans, these loans do not have a forgiveness provision. The SBA underwrites these loans in a manner that is similar to how a bank or credit union might underwrite a loan. This includes an evaluation of creditworthiness and the requirement for collateral for loans over $25,000.   

The primary eligibility criteria for EIDL are that a borrower must meet the definition of a small business (generally, have fewer than 500 employees, but there are exceptions), the borrower must have suffered working capital losses due to the pandemic, and the borrower must be physically located in the United States.   

The other recent clarification to the EIDL program is that not-for-profit applicants do not need to provide the personal guarantee of an “owner” for loans over $200,000. For-profit applicants must adhere to this requirement. 

There has been reluctance among eligible not-for-profits to pursue EIDL loans due in part to the availability of other, more lucrative, federal COVID relief programs, most of which do not require repayment. Why borrow money that has to be repaid when you can obtain funds that do not have to be repaid? The case for taking an EIDL loan is fairly strong if your organization has existing debt that is at a fixed rate of higher than 2.75% or existing debt at a variable rate that is likely to exceed 2.75% in a rising rate environment going forward. There are no prepayment penalties with EIDL loans, so if circumstances change later and you no longer want to carry this debt, you can repay it at any time. 

Note that if your organization’s existing debt includes restrictive provisions, such as a prohibition from additional borrowing without the existing lender’s permission, such provisions must be considered when contemplating an EIDL loan application. 

The SBA has communicated its desire to get as much of this money lent out as possible before the December 31, 2021 deadline. We have seen loan applications approved and funded in as little as three days, evidencing the SBA’s commitment to get this money deployed quickly. More information and the SBA’s application portal itself are at https://www.sba.gov/funding-programs/loans/covid-19-relief-options/eidl/covid-19-eidl. 

You and your organization have been through a lot, and it is only natural to look forward to “flipping the page” to 2022. But don’t miss the chance to leverage these 2021 opportunities to help position your organization for success as you move forward. 

Jeff Paille is a CPA and partner at the Bonadio Group and has consulted with tax-exempt organizations for almost 30 years.