Our nation’s healthcare system thrives, in large part, thanks to the extensive network and critical roles of our tax-exempt public colleges, universities, and hospitals. Throughout the pandemic, tax-exempt public colleges and universities continued to educate and train individuals who carried us through all stages of the pandemic and our recovery efforts, including but not limited to doctors, nurses, and public health officials. And public hospitals—operated and staffed by many of those publicly trained professionals—like their private counterparts withstood enormous strain while carrying the massive burden of responding to healthcare needs during the pandemic.
Significantly, many tax-exempt public colleges, universities, and hospitals are still unaware that they may qualify for much-needed cash relief in the form of the refundable payroll tax credit known as the Employee Retention Credit (ERC). While some institutions have never heard of the credit at all, many others know about the ERC but don’t understand how it may apply to them. With this in mind, we urge you to read below for a better understanding of the ERC, and we encourage tax-exempt public colleges, universities, and hospitals to consider reviewing their ERC eligibility with a trusted tax professional before the window for claiming this relief closes.
Snapshot: Tax-exempt public colleges, universities, and governmental health care employers may be eligible for the ERC for qualified wages paid during the first three quarters of 2021.
On March 27, 2020, Congress launched the ERC as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Congress fully intended for the ERC to be a vital relief measure available to businesses, including those occupying various parts of the healthcare industry, that were negatively impacted by the COVID-19 pandemic. However, the CARES Act expressly excluded governmental employers from ERC eligibility, which meant that tax-exempt public colleges, universities, and hospitals could not take advantage of the ERC.
Several months later, in December of 2020, the Consolidated Appropriations Act, 2021 was enacted. This later legislative measure included the Disaster Relief Act, which in turn contained sections 206 and 207, expanding ERC eligibility to public colleges, universities, and hospitals. The IRS issued Notice 2021-23 further clarifying this exception to the general rule that excludes governmental employers, stating:
[A]mended [CARES Act] section 2301(f)(2)(A) provides an exception for any organization described in section 501(c)(1) of the Code and exempt from tax under section 501(a) of the [Internal Revenue Code], and amended [CARES Act] section 2301(f)(2)(B) provides an exception for any governmental entity if the entity is a college or university or the principal purpose or function of the entity is providing medical or hospital care. [I]n the case of any governmental entity that is a college or university, or the principal purpose or function of which is providing medical or hospital care, the entity shall be treated as satisfying the trade or business requirement in [CARES Act] section 2301(c)(2)(A)(i). Accordingly, these entities may be eligible employers for the first and second calendar quarters of 2021, assuming they satisfy the other requirements to be eligible employers.
Subsequently, Congress enacted §3134 of the Internal Revenue Code (IRC) as a part of the American Rescue Plan, which enshrined the ERC in the law and also extended eligibility for employers, including public colleges, universities, and hospitals, through the third and fourth calendar quarters of 2021 (later, the Infrastructure Investment and Jobs Act would strike that fourth quarter of 2021 unless the business qualifies as a recovery startup business).
With the basis for the exception firmly established and window of eligibility extended, institutions must consider the “other requirements” for eligibility.
Employers in the healthcare industry, including tax-exempt public colleges, universities, and hospitals, are typically eligible because governmental orders restricted their operations. Some examples of this may include:
And the list goes on. In fact, orders creating qualifying partial suspensions were more common than many employers and tax practitioners realize.
Another way for employers to be eligible is by showing that they suffered a reduction in gross receipts.
Tax Year 2021 (Quarters 1, 2, and 3):
Employer is eligible if its gross receipts from all operations of the organization are more than 20% down from the gross receipts in the same calendar quarter of 2019.
Because public colleges, universities, and hospitals don’t necessarily measure gross receipts in the same way as for-profit businesses, the IRS provided guidance on how to determine tax-exempt employer’s gross receipts. The IRS addressed this distinction in Notice 2021-20, clarifying that for purposes of the ERC, the definition of “gross receipts” for tax-exempt employers tracks the IRC §6033 definition of “gross receipts.” As the IRS explained, IRC §6033 and the corresponding regulations provide a helpful list of examples to consider:
Even though governmental entities were originally excluded from the ERC, subsequent amendments have opened the credit to eligible public colleges, universities, and hospitals. We urge such institutions that kept their employees on payroll during the pandemic to review eligibility for this much-needed cashflow opportunity with a trusted tax professional. If you need assistance talk with our team by calling (410) 497-5947 or you can fill out our brief contact form.