Employee Retention Credit Accounting for Nonprofits

CPAs & Advisors

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Throughout the pandemic, the government has strived to lessen the impact on employers. Through various pieces of legislation, credit and grant programs have emerged. One such relief program, the Employee Retention Credit, provides refundable credits to employers. And thanks to year-end legislation, employers who participated in the Paycheck Protection Program also became eligible to receive the ERC. Read more about how to qualify and claim the credit.

The interaction between various pandemic programs and other factors raises questions about how to account for the credit. Let’s take a closer look at GAAP reporting and considerations for nonprofit organizations.

Accounting for the ERC under US GAAP

Nonprofit entities following US GAAP must account for the credit under ASC Subtopic 958-605 as a nonexchange transaction with a governmental entity that is accounted for as a conditional contribution. Organizations must consider the circumstances as of the period end date. Certain conditions must be met to claim the credit, for example, a decline in gross receipts and incurring qualified payroll and health care costs. When an organization has a PPP loan, eligible expenses cannot be used for both PPP forgiveness and the ERC (in other words, no double-dipping). The same holds for other government grants in which a nonprofit organization participates. Management must carefully allocate specific wages between the programs to ensure expenses are used only once.

If the conditions for eligibility are met as of the period end date, then the credit would be recorded as grant revenue under Subtopic 958-605 and reflected as a refund receivable or reduction of payroll tax liabilities. On the statement of cash flows, the change in refund receivable and/or reduction in payroll tax liabilities would be reflected in cash flows from operating activities. Required disclosures include the accounting method used, significant terms of the credit program, relevant information about the line items and amounts included in the financial statements, and the conditions that have not been substantially met (if applicable).

Subsequent events

Organizations that received the PPP loan were originally not eligible to receive the ERC under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed in March 2020. However, the Consolidated Appropriates Act of 2021, which passed in late December 2020, later enabled PPP loan recipients to also claim the ERC. Newly eligible employers can retroactively claim the credit by filing amended Form 941 returns for 2020. Organizations with a 12/31/20 fiscal year-end or later should reflect the subsequently claimed credit as of the financial statement date if the financial statements haven’t been issued yet.

Suppose financial statements were already issued before claiming the refundable credit. In that case, management must assess the facts and circumstances to determine the appropriate way to reflect the change on the next financial statements. The change in prior period information would be considered a change in estimate. If the estimate was made in good faith, then the financial statements can reflect the change on a prospective basis. If the organization missed information readily available to them when the estimate was made, a prior period adjustment would be appropriate.

Contact us with questions about claiming and accounting for the ERC.

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