Stone & Company Non-profit Guidance Series - How to account for your ERC

Since the passage of the American Rescue Plan Act in March 2021 (the Act), which significantly expands and extends the ERC, a refundable credit against the employer portion of social security tax, many more organizations have successfully qualified and received the ERC. The ERC brought some much needed and welcome relief for many non-profit and other organizations. However, entities that are required to issue GAAP financial statements must now determine how to account for the credit and the question is becoming increasingly frequent across our non-profit clients.

For non-profit organizations, the first step is to determine what guidance to follow. After considering the guidance within the codified accounting standards, we determined that the appropriate and applicable guidance for non-profits would be ASU Subtopic 958-605 Contributions Received and Contributions Made. The ERC has barriers of eligibility and thus would meet the criteria for a conditional grant, since the organization only receives the credit if it overcomes these barriers.

Under Accounting Standards Codification (ASC)-958-605-25, which discusses accounting for contributions for non-profit entities, contributions are “recognized when the condition or conditions on which they depend are substantially met”. The ERC comes with several explicit conditions that must be met.

Once an organization determines that the conditions for receiving the ERC have been substantially met during a reporting period, the organization can recognize ERC income in that reporting period.

Since many organizations ask whether they can net the credit against payroll expenses, it is important to emphasize that ASC-958-605 contains explicit presentation and disclosure requirements, which generally discourage netting of income and expenses. ERC credits awarded should be reported gross, as (generally grant) income, with the corresponding payroll-related expenses also reported. Reporting entities should also ensure appropriate note disclosures are made, in accordance with the guidance within ASC-958-605.

The question of the timing of recognition is also important. There are basically two ways to qualify and claim the credit, either a significant decline in gross receipts (from the reference quarter in 2019) or a full of partial suspension of service, as defined in the Act. The timing of recognition will depend on when the barriers under each of the two qualifying pathways the organization takes are met.

Generally, under the suspension of services test, the timing of recognition would be over time, during the qualifying time period when services were suspended, as the organization incurs the payroll expense for the applicable wages.

Under the gross-receipts approach for the credit, the condition (or barrier) would not be met until the end of the quarter, since the test typically involves comparing that quarter’s revenue to the applicable reference quarter in 2019. Thus the revenue would be recognized at the end of the quarter that experienced the decline, or when that condition is met at the end of the quarter after the organization knows the revenue for that quarter.

Once the conditions have been met, it would be appropriate to record revenue, including a receivable for any portion of the credit that has not been received. For organizations that receive advance ERC payments, the appropriate accounting would be to record the cash and a corresponding liability, until such time that all conditions for recognition are met.

For further questions on ERC and similar accounting issues, please feel free to contact your accounting team at Stone. We will continue to monitor developments related to the ERC and related topics as part of our commitment to supporting our clients and the business community.

Stone & Company LLC is a CPA firm in Lexington, Massachusetts – Inspired by our values and focused on service. Contact us at info@stonecpas.com