James B. Jordan, CPA

The Case for Choosing the Correct Software

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A diocese or parish cannot successfully manage their activities without timely, accurate financial information properly represented using correct and consistent accounting principles. Anything less reduces the financial information to an electronic version of a shoebox full of receipts. 

Flexible reporting

A proper accounting system for the Church is one that is designed specifically for use by churches. The resulting underlying architecture of the system is one that is designed to accurately represent church-specific transactions and activities, such as:

  1. Donor-designated restrictions on contributions. The Church often has donations given for specific purposes – youth mission trips, outreach, prayer intentions, columbarium support, flowers, etc. These donor-restricted contributions must be identified separately in the accounting system.
  2. Church-initiated restrictions on income and assets. Money that is set aside by the church for special purposes must also be identified in the accounting system separately to ensure its use for intended purposes. 

Sometimes these monies are very large, and their restrictions and use span multiple years. A proper accounting system is designed to easily and accurately account for these types of transactions. 

Fund accounting

Commercial accounting packages designed for business use are not sufficient; they do not use fund accounting. Fund accounting sometimes uses quadruple entry transactions rather than double, which all commercial packages use. Fund accounting gives the church a way to identify money that is set aside for specific purpose in the books of the church. It requires that revenue and expenses be recorded normally as commercial transactions; but there is also a need to identify the revenue as a donation for a specific purpose and to ensure that the money set aside is released only for an expenditure for the purpose intended. The latter are examples of when fund accounting is necessary. 

Flowers illustrate how fund accounting is typically applied in the church setting. The church will budget for flowers for normal occurrences, such as Sunday Mass. The church, however, will also take donations in memory of someone, particularly for use at Easter. Further, the pastor or trustees may set aside some undesignated money for the purpose of a specific service, such as Pentecost. All three of those monies are accounted for differently, and two require fund accounting. The first example, budget, is basically commercial accounting – pay the flower bill from the general church coffers. The latter two require that the money set aside for flowers be segregated from the general money and spent only for the purpose of Easter flowers or Pentecost flowers. There is a second transaction accompanying the receipt of income that sets aside the money for Easter flowers. There is a second transaction that moves undesignated money from the general fund to the Pentecost flower fund. Neither involved real money, but they are nonetheless necessary for the segregation of money in the books of the church. 

Accounting systems

If an accounting system is not designed to give users the ability to temporarily restrict funds for a specific purpose, then it is of no use to a church, which has designated money all over the place. If a bookkeeper is required to make a journal entry in the books to accomplish a normally occurring transaction, then the software is likely not the right one.    

How do I decide what I need?

Know your industry (not-for-profit, religious institution) and its requirements according to accounting standards. These standards are called Generally Accepted Accounting Principles (GAAP) and are the standard for use across all businesses, including nonprofits. Churches do not have owners. There is no stock ownership. The financial statements look different from a commercial set of financial statements for a reason – donors and donations must be identified and accounted for according to GAAP. In the case of large donations intended to be used over a long period of time, there are laws in addition to GAAP that require this segregation of money and its prudent use.

Know your requirements

All assets of the church are required to be recorded in the accounting records of the church. This means all money in all accounts, regardless of source, and all fixed assets or other items of value. Just replacing existing accounting systems is not the right way to look at the issue. Do not get a general ledger package that is from one vendor and a fixed asset package from another. Get a package that is integrated with all the modules necessary to run the church from a single vendor. The requirements are explained below, but their order does not suggest importance over another. They are all equally important and must be present to select the software for use in your church.

The software must:

  1. Be written for the not-for-profit industry, preferably for churches, and use fund accounting principles and accounting methods in its transactions.
  2. Use the right nomenclature for churches in its financial statements, chart of accounts, user documentation, and training materials.
  3. Be robust enough to easily allow for the initial setup by church personnel (once properly trained).
  4. Never allow a transaction to be altered or deleted. If a transaction is entered incorrectly, another must be entered to correct it. This creates an audit trail to follow all transactions, even errors and their corrections, within the system.
  5. Provide user-specific access with password control at the function level. In other words, prevent the person who posts the contributions from also accessing the general ledger. Allow for an individual to print reports, but never touch the accounting transactions. Allow the rector to access the demographic data of parishioners, but not the financial giving data. All of this requires user-specific access with password control. 
  6. Provide for the retrieval of data to produce user-specific reports in addition to GAAP statements. 
  7. Provide for the proper accounting of unrestricted, temporarily restricted, and permanently restricted fund balances and identify if they should ever get out of balance.
  8. Provide for GAAP accounting transactions of all types, especially for church-specific transactions.
  9. Provide for cash and accrual bases of accounting separately and intermixed to create a modified cash basis of accounting.
  10. Contain all modules necessary to keep the financial records of the church. For example, a module for contributions including a receipts journal by donor; one for fixed assets and depreciation; one for check disbursements including a disbursements journal by payee and a check register; a general ledger including a record of all journal entries; payroll. These are not only useful, but required for internal control, audit trails, or reconciliation.
  11. Process transactions as they normally occur in the daily life of the church. What I mean by that is the software is so well designed that if you do not know how to process a particular transaction, it is intuitive where to start and the software follows a logical method because the software works like the church does. It may sound vague, but if you are using software that does not work like this, you know exactly to what I am referring.
  12. The vendor must be of sufficient size and longevity to provide proper customer service, prompt issue resolution, program fixes, clear and concise documentation, and detailed educational materials. These take money and lots of it. A small vendor has a few hundred churches using their software. A vendor of sufficient size has several thousand churches (entities, not users of which there could be multiple per church). 

Summary

Churches are required to use fund accounting by nature of their industry and types of transactions. ACS OnDemand or Realm (both from ACS Technologies) were designed specifically for churches to allow the easy recording of naturally flowing transactions of the church. If your church is not using one of these, don’t walk away from what you are using – RUN!!

Financial Management for Episcopal Parishes

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James B. Jordan’s book was written to help parishes of all sizes establish good financial management processes and policies.

Experience shows that open and transparent churches engender a greater feeling of trust and willingness on the part of the donor. The policies and processes in Financial Management for Episcopal Parishes, which can be implemented by any size church, allow clergy, vestry, and parishioners to establish and document procedures that enable a financially transparent organization.

The book defines the roles of the clergy, staff, vestry, and congregation and outlines what needs to be done by them to design and implement a system of checks and balances for financial oversight and stewardship, in order to protect donations and assets. Throughout the book, real-life examples of processes and procedures that did not work (and why) make for enjoyable reading of an otherwise business-like subject. Every reader will recognize some of them in their own church life.

Available on Amazon and in religious bookstores nationwide.

Financial Visioning in Seven Steps

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Visioning is defined as “the development of a plan, goal, or vision for the future.” In this excerpt from Lewis Carroll’s Alice in Wonderland, Alice does not have any vision at all. Alice is going with the flow, doing things the way they have always been done, not rocking the boat, and biding her time on the vestry. By definition, a vision identifies a desired state, usually followed by a goal that is reached. Without a vision of where the congregation wants to be, how will it know when it arrives? If a person cannot imagine success in their mind, how do they ever expect to achieve it?

Visioning is hard, at least to carry the vision through to reality. It takes a leader to have a vision and inspire others to make it their own, too. Too often good visions are not realized for lack of taking the steps necessary to achieve the vision. The vision seems too ambitious, too far into the future, or requires too many resources. Such attitudes will assure the vision will not be achieved.

What is required of the process of visioning is to break the vision down into manageable parts that define the vision, mission, goals, tasks, and activities necessary to execute on a daily basis to move toward the vision. Some might call this the difference between having a strategy and the process of strategic planning.

Congregations often see the future as, “how are we going to end the year with this year’s budget”, or only as far as the plan for next year’s budget. Often, there is no plan in the budget, or money set aside, for future events. Some of those events can be foreseen. For example, the carpet is looking worn, the hymnals or prayer books are losing pages, or the paint is peeling on the exterior of the building. Other events are big surprises, such as the air conditioning needing replacing after failing on Good Friday, or the sudden leak in the sanctuary’s roof. To keep the operations of the church going while planning for the future requires a different perspective on future financial matters than most vestries pursue. It is not about the annual fiscal budget solely. There must be a plan for a number of events, some near-term and some in future years.

Financial Strategic Planning

Step 1: Gather data

An assessment must be made of the state of the congregation. What are the demographics of the members and visitors? How has that changed in the last ten years? What is the prognosis for what the demographics will be in the next ten years? And, what does that mean for the future income potential? Using the Episcopal Church’s “Study Your Neighborhood” website, select “explore your neighborhood.” Most congregations do not know about this wonderful service that will give both historical and future demographic information about the congregation’s market circle, including households, income, age, ethnicity, and more.

Step 2: Analyze data

An assessment must be made regarding the donors. If the congregation is running ACS Technologies software, a ten-year analysis of individual and total giving can be readily produced. The objective is to learn about the giving trends. What are the congregation’s experiences of giving from their donors (amounts and purposes)? Pledge donations are generally for operating purposes, while designated gifts are, too, but for specific purposes. Attention needs to be paid not only to the trend (increasing or decreasing) but also to the ratio of designated giving to total giving. If that ratio is on the rise, I get concerned about the commitment of the members to the congregation’s general direction pastorally. A shift away from pledges towards other giving might indicate a problem. This could mean the members do not feel a part of the Body of Christ, but are becoming siloed in their own personal interests or disillusioned with the general vision and mission of the congregation.

Step 3: Take stock of the current status

An assessment of the physical facility must be made. It would be wonderful if there were a fixed asset schedule that listed when the carpet was installed, when the roof was put on, or when the air conditioning system was installed. In addition, a fixed asset schedule would list the estimated useful life, acquisition cost at the time, and estimated remaining useful life. Having one gives future vestries insight regarding when things might need replacing and the ability to proactively plan for them. But the vast majority of parishes do not maintain one. However, the need for understanding this information in order to properly identify future financial requirements beyond operating expenses is very important. An effort must be made to ascertain when some of these components were installed, when they might need replacing, and what the replacement cost would be today. A spreadsheet is helpful to forecast the replacement year, and the estimated future cost.

Step 4: Develop a plan

Develop two budgets – one for operating and one for capital needs. Most congregations are not prepared for an emergency like an air conditioner malfunction. Many are fiscally hurt by such a large, sudden expenditure. The operating budget needs to consider the income and expense expectations for the operation of the church for the year. The capital budget needs to establish projected replacement items, time frames, and costs. While the planning horizon for the operating budget is a year or two, the capital budget planning horizon needs to be sufficient to encompass major components, such as painting, carpeting, roof, plumbing, electrical, air conditioning/heating systems (HVAC), parking lot resurfacing, refurbishing the organ, etc. A twenty-year horizon is the minimum to use for capital budgeting planning.

A year-by-year schedule needs to be developed with the expected capital expenditures per year. This gives a cash requirement by year for future years from which to plan the reserves that need to be set aside and accumulated each year in preparation for the capital event.

Fold the capital cash requirements back into the annual fiscal budget to begin to accumulate the planned repair or replacement of items. This blending of the capital budget with the annual operating budget will yield a new required cash income to support both the capital and the operating budgets for the year. Often, this is an eye-opening experience and generates a lot of capital campaigns to establish or catch up with the cash reserve needs that likely have not been set aside to date.

Step 5: Assess the feasibility of the plan

Refer to the previously mentioned donor analysis and determine if the trend will support the new budget. Often, it appears as though the capital budget cannot be supported by the current giving levels. But it has to. Failure to provide for future large expenditures for the sake of current gratification of programs or salaries is fiscally not sound, detrimental to future vestries, and risks the future financial stability of the congregation.

Step 6: The Make vs. Buy decision

Do we have the expertise, broad consensus, institutional drive, and manpower to execute the plan in the congregation? I suggest the congregation considers hiring a company that specializes in developing and running stewardship and capital campaigns. They are likely going to conduct a feasibility study initially to determine the appetite of the donors which usually means interviewing specific donors. A reputable company will not recommend a capital campaign that does not have a likelihood of success. They have a reputation to maintain and only want successful campaigns, as you do. They will suggest timing, amounts, messaging, dates, events, and other integral parts of a successful campaign based on their experiences with success. If not hired, the congregation will need to conduct these activities regardless in order to be more successful.

Step 7: Execute the plan

Good planning can go awry in the execution of the plan for a myriad of reasons. Lack of appropriate, clear, and consistent messaging is one of the main reasons for failure. Follow-through, monitoring, and honest in-progress assessments and adjustments can either add to successful execution, or failure to do those things will detract from the successful execution. With good planning and execution, the congregation stands a better chance of achieving the vision.

In summary, having a future vision is a good thing. It entails a strategy that shows hope for the future. Realizing that vision is quite another thing. It takes strategic planning to bring it to fruition. Whether it is this example of budgeting or some other long-range vision, the fruits are in the process of strategic planning and execution thereof that make the difference between a dream and reality.

Financial Transparency

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Transparency is a “buzzword” in many situations. It means many things to many people, but generally elicits a positive response in most minds – transparency is a good thing.

When applied to the church as a whole and to a local parish, school or other church organization in particular, it begs the question, “transparency of what?” There are basically two sides to that equation – pastoral and temporal. Pastoral transparency may or may not be a good thing depending upon the situation. Making known the rector’s openness and accessibility for pastoral concerns at any time is inviting and a good thing. Making the confession of a parishioner available is not. For the purposes of this article, we will leave pastoral transparency to the discretion of the priest and vestry. Temporal transparency, on the other hand, is generally misunderstood, ill-defined and poorly implemented throughout the church; probably not by design, but because of a lack of focus and the failure to understand its importance.

What is Transparency?

It is important that we first start with a clear definition when speaking of transparency. Merriam-Webster’s Dictionary defines transparent:

2a: free from pretense or deceit: frank
b: easily detected or seen through: obvious
c: readily understood
d: characterized by visibility or accessibility of information especially concerning business practices

When thinking of your parish and its dealings with money, is it secretive? Do you regard the clergy discretionary account as a secret, not to be seen by anyone other than the clergy? Do parishioners have an easy way to learn how the vestry spends and allocates money? Are the current income and financial stability of the parish clearly communicated in multiple media outlets? Is there a plan to be financially transparent? Why is it that greater transparency often leads to greater giving, greater trust and greater investment in the church’s mission? Let us examine some of the inhibitors of transparency in churches, and conversely, the enablers.

Inhibitors: What hinders transparency?

It all starts with the leadership of the parish – clergy and vestry. The rector, priest-in-charge, interim or vicar is the top clerical leader. If the tone at the top reflects indifference, unwillingness to get involved in the church’s temporal affairs, disbelief in transparency or the like, the congregation will view transparency as unimportant.

If there is a lack of internal control with regard to money – separation of duties, checks and balances – parishioners and other donors will feel less comfortable contributing. In more severe cases, mistrust regarding donations is detrimental to the financial vitality of an organization.

Often, lack of communication or the wrong communication inhibits transparency. Maybe there is no monthly financial reporting to the congregation. Perhaps the vestry minutes are not published and there is discomfort when speaking of money in the church. Sometimes money accumulates outside the oversight of the vestry, as in a thrift store or men’s club, and there are side checking accounts. These things foment rumors and distrust. “Each of you must give as you have made up your mind, not reluctantly or under compulsion, for God loves a cheerful giver.” (NRSV, 2 Corinthians 9:7).

Enablers: What creates transparency?

It is important to examine all parts of the organization and ensure they are working in concert to enable transparency – its people, processes, technology, and the organizational structure itself.

We turn back to leadership for the people part. Attitudes that foster transparency in financial matters – and other daily activities of the church, for that matter – begin with the attitudes and opinions of the bishop and diocesan officers and the parish clergy, staff and vestry. These must be stated and shared openly.

Processes for handling money must be sound and free from the opportunity for fraud. If just one or two people count the offering, post the books, and reconcile accounts, there is a serious lack of separation of duties. The congregation knows that, whether one realizes it or not. If a parishioner sees only one person taking the collection plate to an out-of-sight place, it is natural to question the safety of the donation just made.

Title I, Canon 7 of the Episcopal Church Constitution and Canons requires that every organization in the Episcopal Church is required to keep adequate records and have them audited each year. The technology used should be appropriate for church accounting and appropriately implemented. Fund accounting packages designed for churches include products from ACS Technologies and Blackbaud. The use of accounting software that cannot accommodate fund accounting (e.g., QuickBooks) can be problematic in achieving efficient and effective accounting.

Organizational structure is an enabler when roles are clearly defined. For example, the vestry is fiduciarily liable for the money of the church. It is in the vestry’s best interest – and its role – to deliberately design and approve the internal control processes that are implemented by the church. It is also their role to inspect and provide oversight for those processes. It is the lead clergy’s responsibility to implement those controls on a daily basis with staff and volunteers. When there are procedures in place for handling and processing financial transactions, a part of the congregation will also be involved in carrying out those procedures. The transparency of the internal control will become apparent and actionable by the parishioner.

Transparency leads to growth and healthy stewardship

While I know of no academic study of the effects of transparency, in my work with hundreds of churches, I have seen that churches that are transparent in their operations and financial matters are in better shape than those that are not. People join and contribute to organizations they consider to be successful. Healthy stewardship thrives where transparency instills the desire to join, contribute and participate in the organization’s success. And, if the church is in need of revitalization, being transparent about the need and keeping the parishioners informed and engaged in the journey, demonstrates an organization that is working towards its goals and its future mission.

Important ERC Update from the IRS

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Well, nothing is ever for certain when it comes to the IRS.  On November 2, 2023, the IRS Director for ERC, John J. McInelly, held a live webinar for trusted tax professionals in which he issued guidelines for withdrawing ERC filings and amending ERC filings, each of which assumed that an ERC filing had been previously made.  

However, he made two announcements that changed how we should think about ERC for those who have not already filed.  First, the IRS is now allowing those who have not previously filed to mail their ERC filings to the IRS now and not wait until the pause is over.  That is a change from the vague guidance that was given before, which indicated they would not want filings to occur again before the pause in processing had ended.  It does not mean they will begin processing your filing before the pause ends. But it does mean they want you to file now – if you believe your filing is accurate and legal. This will put you in the queue faster than waiting to file as previously directed.

Consequently, all who sent us their information for filing during the pause will now be receiving their amended 941-Xs from us for immediate filing.

The second and most important announcement he made was that there are no plans to ask Congress for an extension to the statute of limitations on the ability to file for ERC for 2020. If you have not postmarked your filing by April 15, 2024, you will lose the ability to get a refund forever for the year 2020, even if you are entitled to one.  

Nothing is ever for certain when it comes to the IRS. While the possibility of the statute changing exists, what we were just told is not to count on it. Begin the process of determining if your church can file for ERC and how much the refund would be if you are able to file – and do it now before the statute runs out.

Categories ERC

The IRS Paused ERC Submissions – What do I do now?

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The IRS has received so many Employee Retention Credit (ERC) applications from scammers that they have been overrun with fraudulent submissions. To combat the deluge of illegitimate claims, they have “paused” the receipt of any further applications through the end of the year, effective September 14, 2023.  This does NOT mean they have closed the program.  It does mean they are not going to receive or process any new submissions during this time while they sort through the claims and eliminate the ones that are fraudulent.  Once this work is completed, it should result in quicker processing times to get the checks in the hands of legitimate filers.  

Any submissions already received by the IRS will continue to be processed.  However, they are changing their target of a 90-day turnaround to one of 180 days.  Any submissions already received will be given additional scrutiny to determine if they have a connection to the scammers or appear to be fraudulently filed.  They may ask for additional information before finalizing the processing of the claim for the ERC refund.

For those filers who do not trust the company they used to file and wish to withdraw their filing, there will be procedures for that announced by the IRS later this year.

The IRS published schemes used by scammers to entice churches and business owners to file returns when they should have done more due diligence to determine if they were eligible.  Those characteristics include:

  1. Unsolicited calls or advertisements mentioning an “easy application process.”
  2. Statements that the promoter or company can determine ERC eligibility within minutes.
  3. Large upfront fees to claim the credit.
  4. Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
  5. Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.

Here is an example of what one of the solicitations looked like. A ministry partner sent this to me, and I turned it over to their ERC Criminal Investigations Unit to investigate.  You will notice some of the claims made by the author of the letter from the list above.

What does the IRS recommend?

“Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.” 

ACS Technologies has partnered with our firm to ensure their ministry partners have access to a trusted tax professional.  James B. Jordan CPA, LLC is a member of the American Institute of Certified Public Accountants (AICPA).  As such, we are bound by its professional ethics and to which we ascribe and adhere.  For more information, please click here.

Frequently Asked Questions (FAQ’s)

  • I have not filed or even started the process; should I wait?
    • NO!  That is the wrong approach.  You should immediately engage a trusted tax professional and begin the process of applying.  That way, you’re not in a rush to file when the IRS opens back up.  We have seen it take two days to two weeks for churches to gather the information we need, and depending on your circumstances, it could take several weeks to determine your eligibility.
  • Why the urgency to get our information to you?  Two reasons.
    • The filings are by mail only because they involve actual signatures; no electronic filing is available.  You want to get yours in the mail the day they reopen, not start the process of preparing to file!
    • The statute of limitations for being able to file for 2020 ends on April 15, 2024.  Unless Congress acts to extend the statute of limitations, all returns not filed by that date for 2020 will become invalid and will not be processed.  So, don’t lose out on the opportunity to file by delaying your analysis of eligibility, which we do at no charge.
  • What do I do if I have already filed and want a second opinion?  Contact us now!  We offer all ACST ministry partners an analysis at no charge.  We will offer our observations of your situation and discuss what your options are.
Categories ERC

Understanding Employee Retention Credit (ERC) Checks

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After your Employee Retention Credit 941-Xs have been processed by the IRS, you will receive one or more refund checks (if the IRS approved them for payment). The next step in the process is depositing and posting your check(s). The first thing to consider when receiving an ERC check is that it is NOT income. ERC checks are tax refunds.

Accordingly, ERC checks should be reflected as such in your financials and not added to your church management system, where they could be misconstrued as a donation or contribution. Deposit the checks in the bank separately from other deposits, making it easier to find them later when bank reconciliation needs to occur.

In a for-profit company, ERC checks would be charged against taxes paid in 2020 and 2021 and require the restating of those years’ financial statements, amending of the tax returns for those years, and the payment of income tax due as a result of not being able to deduct payroll taxes for those years. Thankfully, in the non-profit arena, none of that applies (churches are exempt from paying Federal income tax unless they – rarely – have Unrelated Business Income Tax).

To properly record the check, post it to an account in the non-operating section of the statement of activities.

  1. When looking at the chart of accounts, find the section that is titled “Other Income” as a fixed section heading. If one is not there, create one below the 5XXX expense accounts.
  2. When selecting the type of account on setup, select the “Other Income” type.
  3. Assign an account code in the 6XXXX range. This is assuming you have conformed to the ACS recommended account numbering structure.
    • 1XXXX Assets
    • 2XXXX Liabilities
    • 3XXXX Net Assets
    • 4XXXX Operating Income
    • 5XXXX Operating Expenses
    • 6XXXX Other Income (generally unrealized gains and losses on investments and extraordinary income, such as ERC)
    • 7XXXX Other Expenses (generally investment expenses in brokerage accounts and extraordinary expenses)
    • 8XXXX Donor-designated funds
    • 9XXXX Permanent corpus portion of endowments
  4. Name the new 6XXXX account “ERC” so you can identify it on your statement of activities.
  5. The debit is the checking account for the deposit, and the credit is to the 6XXXX account.

Alternatively, if your governing body of the church decides to designate the checks for a special purpose, such as benevolence, building repair, capital campaign, etc., then put the amount in the corresponding designated purpose account. The debit is the checking account for the deposit, and the credit is to the restricted account, either 3XXXX or 8XXXX. (If set up properly, 3XXXX is for governing body designations, and 8XXXX is for donor designations, which would not be the appropriate place to put the credit. However, many churches mix the two.)

Some denominations assess annual or monthly fees of their churches based on income. As mentioned, ERC checks are not income; they are a tax refund. The above method should keep the funds out of operating income and be safer from assessment. With a refund of taxes, the church’s governing body can spend the funds on whatever they deem appropriate without any strings attached.

Categories ERC

What Is ERC and Why Should You Care About It Now?

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The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while sustaining a full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority.

The CARES Act and subsequent acts created ERC because the federal government wanted to provide payroll relief for those employers who kept employees on the payroll during COVID starting March 13, 2020, through September 30, 2021. It is a refund issued by the IRS that allows a church to spend money on whatever they choose or save for the future. It requires complex calculations and is applied for by filing modified payroll tax returns for the period. As a result, each quarter of 2020 and 2021 are analyzed from payroll data to determine the refund amount. Subsequently, a check is issued for each quarter if it is approved.

History

ERC is not new. It was used to support the recovery efforts of employers who experienced losses from Hurricane Katrina in 2005. It was repealed by Congress in 2018 for the purposes of Katrina relief.

Current State of ERC

These acts led to the current ERC.

CARES ACT

ERC was initially enacted as a part of the Coronavirus AID Relief and Economic Security Act (CARES Act) on March 27, 2020, making it retroactive to March 13, 2020. In addition to ERC, the CARES Act also included provisions more familiar to the general public, such as the Paycheck Protection Program Act (PPP) and Economic Injury Disaster Loan (EIDL) loans, Families First Coronavirus Response Act (FFCRA) for sick leave, and more. The CARES Act enacted ERC for quarters in 2020.

Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act)

The main provision of the Relief Act was to remove the prohibition of getting a PPP loan and not ERC, or vice versa. Enacted December 27, 2020, businesses could now get ERC even if they received one or both PPP loans available with the caveat that PPP loan amounts used for payroll could not be used in the calculations for ERC relief. It also extended ERC into the first two quarters of 2021.

American Rescue Plan Act of 2021 (ARPA)

ARPA was enacted on March 11, 2021, and further expanded ERC to include the last two quarters of 2021.

Infrastructure Investment and Jobs Act (Infrastructure Act)

The Infrastructure Act was enacted on November 15, 2021, and repealed the general availability of relief in the fourth quarter of 2021. It is still available, but only to Recovery Start-up Businesses and not those that were in existence prior to February 15, 2020.

Common questions about ERC

  • Are we eligible if we received one or both PPP loans? YES. The misconception that getting a PPP loan precluded getting ERC is founded in the CARES Act, which initially prohibited receiving both ERC and PPP, but the prohibition was repealed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
  • Our revenues did not go down. Do we qualify? YES. There are two different ways to qualify – either a reduction in revenue or a disruption in operations. Most churches qualify due to a disruption in operations.
  • Are there limitations on the size of organizations (number of employees) that can get ERC? NO. However, additional calculations are necessary to determine the extent of qualification and the refund amount. We will require payroll information for all of 2019 in addition to that of 2020 and 2021.
  • Is there a time limit in which we need to apply? YES. Do not delay. There is both a time limit and a dollar amount authorized by Congress for refunds. If either is reached, you will not have an opportunity to file. The ability to file for ERC begins to decline quarter by quarter on April 15, 2024 and ends on April 15, 2025.


What do we need to do to apply for ERC refunds?

First, you need to confirm your eligibility with the IRS. The IRS website includes the forms to complete, but you may want to hire a tax professional to navigate the process.

While the ERC application process is complex, it’s absolutely worth the investment to recover funds lost during COVID-19 and does not impact a PPP plan if your church has one. If you’d like help with the ERC process, click here.