League Cautions Due Diligence for CUs Claiming Employee Retention Credit; While Technically Eligible, FIs Most Likely Do Not Qualify Based on 2020 IRS Guidance The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021. State-chartered credit unions were eligible for the credit previously while federally chartered credit unions are added in the 2021 update -- with the caveat being, any credit union seeking to claim the tax credit would be subject to qualification. Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after Dec. 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021. Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this. Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either: A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%). Analysis based on information published by CliftonLarsonAllen. Additional Considerations 1. Financial institutions have generally not experienced the significant decline in revenues required to qualify under criteria #2 above; however, many entities have been asking whether they could qualify for the credit under criteria #1 above if they have closed branches or lobbies to customer traffic. 2. Most states, including Virginia, have deemed financial institutions to be essential services during the COVID-19 crisis. Though many institutions have elected to close their lobbies, change their hours, or in a few cases close some branches entirely, based on our discussions, the vast majority of these changes have been voluntary and have not, technically, been government-mandated. This point is further supported in the IRS’s 2020 guidance (specifically a published FAQ). FAQ Question #30 asks: If a governmental order requires non-essential businesses to suspend operations but allows essential businesses to continue operations, is the essential business considered to have a full or partial suspension of operations? No. An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer to remain open, even though the governmental order requiring non-essential businesses to close may have an effect on the employer’s operations. Conclusion Based on this 2020 guidance, your League believes financial institutions' qualification for the Employee Retention Credit (ERC) is in doubt -- even if they have made significant changes to their branch operations as a result of COVID-19. Our take is that while credit unions are technically eligible for the Employee Retention Credit (ERC), based on the IRS 2020 guidance, credit unions would fall short of meeting the qualification criteria outlined above. We are still awaiting IRS guidance for 2021. Unless the treatment is changed in 2021 for essential businesses, our position would remain the same: financial institutions most likely will not qualify for the Employee Retention Credit (ERC). We understand that our reading of "qualification" for financial institutions may differ from others. If you do decide to pursue the Employee Retention Credit (ERC), we urge you to consult a tax professional prior to claiming the credit. We will provide any necessary updates once the IRS releases its 2021 guidance. NOTE: Financial institutions may be eligible for other employer-related benefits and credits, such as the ability to defer payment of employer social security taxes, employee emergency paid leave credits, or employee family medical leave credits.
