Three Common Issues Navigating ERC Eligibility for Catholic Churches
November 9, 2023
Contributor: Asaph Bashioum, Senior Associate | Tax Credits & Incentives Advisory
Numerous Catholic churches encountered operational challenges amid COVID-19 restrictions on commerce, travel and gatherings. State and local orders impacted essential services like worship, youth ministry, fundraising, marriages, funerals and community outreach. Decision makers in Catholic dioceses and parishes should grasp the basics of the Employee Retention Credit (ERC) to seize a valuable opportunity during these times.
ERC and Catholic Parishes and Dioceses
Here are three common topics that arise when Catholic churches begin exploring their eligibility to claim the ERC:
When you add together the employees of a Catholic diocese and their parishes, they would almost always qualify as a large employer (more than 100 full-time employees for 2020 and more than 500 full-time employees for 2021). This greatly limits the amount of qualified wages.
Catholic dioceses and parishes are not-for-profit entities subject to not-for-profit aggregation rules. Not-for-profit entities can be in a controlled group with other not-for-profit entities if they are commonly controlled via the same board of directors, or if the entities are connected to a management company that provides regular and continuous management functions to these entities.
If the Parish board of directors differs from the Dioceses, it is treated as a separate entity for ERC, as Catholic dioceses usually do not engage in consistent management functions, with each Parish having its own council and priest for leadership.
Many states and counties made specific exemptions for religious services in their stay-at-home orders, allowing churches to host indoor gatherings for worship when other businesses were shut down.
While many Catholic churches were able to stay open during the pandemic, they were still impacted by government orders through limited travel and group meetings. To determine if this was a significant impact, other service lines including ministries, community outreach, mission trips, charitable work, weddings, funerals, fundraising and social events need to be considered. These services are closely related to a church’s core mission and have dedicated parish staff. If the churches were unable to conduct these services, it could amount to a partial suspension, even if there was no revenue attached to these service lines.
Throughout the COVID-19 pandemic, several churches had increased contributions, even as people were unable to attend mass in person.
Even if a church did not suffer a significant revenue decline, it still may have suffered through partial suspensions. Many not-for-profits were not able to perform a range of services related to the church’s mission that do not generate revenue.
If at least 10% of employee hours were dedicated to certain services that were prohibited or significantly disrupted due to government mandates, this was considered a partial suspension.
Example: A parish has a staff of 20 full time employees, including two full-time youth ministers and one preschool director. In 2019, the parish dedicated 15% of their total employee hours to youth ministry and preschool operations. Both of those groups would be considered disrupted by COVID-19 government mandates limiting group meetings.
ERC Overview
The ERC is a refundable tax credit available to for-profit and not-for-profit employers who experienced disruptions due to COVID-19 related government orders in 2020 and 2021. To be considered an Eligible Employer for the ERC, one of two criteria must be met through either a partial suspension or a decline in gross receipts due to government mandates.
Partial Suspensions
A partial suspension occurs when government mandates restricted a part of an employer’s operations that, in 2019, contributed at least 10% of the employer’s total revenue or occupied at least 10% of the employer’s total employee labor hours. To claim the ERC based on a partial suspension, an employer must be able to point to the specific government mandate that caused the suspension and can claim ERC on wages paid during that mandate’s duration.
Decline in Gross Receipts
To evaluate a decline in gross receipts, each quarter of 2020 and 2021 are compared to the same quarter in 2019. For the 2020 credit, eligibility starts with a 50% decline in the first quarter compared to 2019, ending when there was less than a 20% decline in the subsequent quarter. In 2021, any quarter wit at least a 20% decline is eligible, and past quarters’ gross receipts can substitute for evaluation. ERC can be claimed on wages for the entire eligible quarter.
In 2020, the ERC is 50% of qualified wages; in 2021, it is 70%. Entities with less than 100 full-time employees in 2019 have Qualified Wages capped at $10,000 per quarter in 2020 and the first three quarters of 2021, limiting ERC to $5,000 per employee in 2020 and $21,000 in 2021.
Cherry Bekaert Is Here to Guide You Forward
If you have filed or are considering filing an ERC claim and are now concerned about the calculation or eligibility, the Cherry Bekaert ERC team is readily available to review your facts and help you determine whether a claim for ERC benefits is appropriate.
Related Guidance
Guide to Employee Retention Credit for Religious Groups: Churches and Non-Profit Organizations
IRS Update on ERC Eligibility: 5 Scenarios That Do Not Qualify as Supply Chain Disruptions
ERC Audits: How to Prepare
September ERC Update: How to Avoid Employee Retention Credit Scams