At the start of the COVID-19 pandemic, few institutions were required to adapt so quickly to operating restrictions as churches and houses of worship. To speed up their post-pandemic recovery, churches may be able to file for the Employee Retention Credit (ERC) for qualifying quarters. However, several factors must be considered when determining eligibility. Many churches were forced to close in 2020 due to government orders.As a result, people were unable to attend services in person. Group ministries for youth, adults and others were prevented from meeting in person. Other normal church activities like giving aid to the less fortunate, providing summer camps for children and religious education courses were hampered by COVID social distance and group event restrictions. Understanding ERC eligibility is a crucial step and should be undertaken by every employer before filing an ERC claim.
Background on the ERC
The ERC is a tax credit introduced in the CARES Act to provide financial relief to employers negatively impacted by the COVID-19 pandemic. The credit is available to employers who experienced either a significant decline in gross receipts or were at least partially suspended due to government orders. To qualify for the credit, employers must meet certain eligibility criteria and file the necessary paperwork, Form 941-X, with the IRS.
Qualified wages of large, eligible employers are limited to just those wages paid to employees for time those employees were not providing services. Qualified wages for small eligible employers, however, include all taxable wages for all employees during the period in which the employer is considered an eligible employer. The ERC definition of a large employer is different for 2020 than 2021. While in 2020, an employer is considered large if they averaged more than 100 full-time employees based on headcount in 2019. In 2021, they are large if they averaged more than 500 full-time employees during 2019.
The ERC may be a valuable tool for eligible businesses to help offset the financial impact of the pandemic after having retained employees.
Common Misconceptions Related to the ERC for Churches
As mentioned previously, unique factors facing churches result in several common misconceptions regarding the ERC. These often result in churches disqualifying themselves from eligibility without further research.
After several months into the pandemic, churches in many states were allowed to open subject to social distancing, building capacity restrictions, and group activity restrictions. Many churches my feel that since they never fully shut down, they do not qualify. However, if a church experienced a partial suspension of operations with more than a nominal impact on the church “business” or activities, the church may be considered eligible to participate in the ERC.
Another common misconception is related to gross receipts. Many members of churches moved to an online giving method to contribute their offerings to their church.As a result, their gross receipts did not show a significant decline. However, many other facets of a church were unable to meet the needs of their congregations as a result of the COVID restrictions.Churches could not host fundraising dinners or festivals. They could not have oversea Missionaries travel and raise funds for these missions.
ERC Eligibility for Churches
Many organizations focus on gross receipts and look no further if they experienced the same or greater revenue during the pandemic compared with 2019. However, churches should consider several factors that may demonstrate their operations were impacted by government orders related to COVID-19. If a church was required to shut down in-person instruction or was allowed to reopen but only under limited capacity, they may qualify under the partial suspension test.