The rules of the ERC have changed a few times, and the IRS is continuously providing new guidance. Churches that had previously ruled out this credit may now wish to reevaluate their eligibility. A small church can easily qualify for the credit and could potentially get tens of thousands of dollars back in their pockets.
Determining Your 2020 Eligibility
In Pierce County, churches were considered fully shut down between March 23rd, 2020, and June 5th, 2020, when the county moved from Phase 1 to Phase 2 of the reopening plan. Churches are eligible for a credit for qualifying wages paid during that time frame.
During Phase 2 churches were limited to 25% capacity plus social distancing. This lasted until May 13, 2021. This had a nominal effect if:
- The services shut down made up 10% or more of gross receipts, OR
- The services shut down made up 10% or more of the employees’ total hours.
Examples of how the reduction in hours could have happened include:
- The minister was no longer permitted to do some duties, such as conducting in home counseling sessions, officiating weddings and funerals, etc.
- The paid childcare attendants could no longer work due to cancelled service.
- The paid choir director no longer had to coordinate and do rehearsals and instead only did a minimal amount of work for remote services.
Any of the above examples would qualify.
Wages that qualify do not include pastoral wages, but do include their group health insurance premiums paid by the church. During 2020, the maximum amount of qualifying wages per employee is $10,000 on an annual basis. The tax credit is equal to 50% of qualifying wages.
Determining Your 2021 Eligibility
For 2021 it is easier to pass the gross receipts test. For example, if your church had $100,000 in donations during quarter 1 of 2019 and only $75,000 during quarter 1 of 2021, that qualifies as having less than 80% of gross receipts. This would qualify the church for quarter 1 and 2 of 2021.
If your church didn’t have a decline in donations, it may still qualify based on being partially shut down. Pierce County was limited to 25% capacity until May 13th, 2021, and limited to 50% capacity until June 30th, 2021, when Governor Inslee lifted all restrictions.
During 2021, the maximum amount of qualifying wages per employee is $10,000 on a quarterly basis. The tax credit is equal to 70% of qualifying wages.
Frequently Asked Questions
Question: The church could still have service, just limited capacity. Were we really shut down?
Answer: YES! The IRS has provided the following example: “Under a further governmental order, Employer F is permitted to offer indoor dining service, in addition to outdoor sit-down and carry-out service, provided that all tables in the indoor dining room must be spaced at least six feet apart. Under the facts and circumstances, the governmental order restricting the spacing of tables limits Employer F’s indoor dining service capacity and has more than a nominal effect on its business operations. During this period, Employer F’s business operations continue to be considered partially suspended because the governmental order restricting its indoor dining service has more than a nominal effect on its operations.” (Source: Question 34)
During Phase 2 of the government shutdown, churches were limited to indoor services at 25% capacity only with social distancing enforced. If we apply the above scenario to a church shutdown, it would read as follows: “Under a further governmental order, Employer F is permitted to offer indoor worship service, in addition to outdoor worship service, provided that all families in the indoor sanctuary must be spaced at least six feet apart. Under the facts and circumstances, the governmental order restricting the spacing of worshipers limits Employer F’s indoor worship service capacity and has more than a nominal effect on its business operations. During this period, Employer F’s business operations continue to be considered partially suspended because the governmental order restricting its indoor worship service has more than a nominal effect on its operations.”
Question: What about quarter 4 of 2021?
Answer: This is currently up for debate as part of President Biden’s infrastructure plan. The consensus is that the tax credit will not be extended for quarter 4 of 2021.
Question: But we received Paycheck Protection Program (PPP) funds. How does that factor into the ERC?
Answer: You cannot use the same funds for PPP and the ERC. You will have to reduce eligible wages in your calculation. You can allocate as much of the PPP forgiveness as possible to pastoral wages and housing allowance to maximize the credit.
Disclaimer
Like most tax legislation, the Employee Retention Credit is very complex. Please consult with a tax practitioner or tax lawyer before execution.
Pursuant to the rules of professional conduct set forth in US Treasury Department Circular 230 nothing contained in this case study was intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Our use of a disclaimer does not change the high degree of care and attention that we devote to our tax advice. Moreover, the inclusion of the disclaimer does not indicate that penalties could be imposed on the transaction at issue, but rather merely indicates that the advice we have provided you in such communication does not preclude the IRS from asserting penalties. Finally, please be assured that the use of such a disclaimer to avoid unnecessary legal expenses is similar to the approach adopted by most other tax practitioners.
ERC Consultation
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Originally published at edmondsbookkeepingandtax.com on November 14, 2021.