IRS Weighs In on FCU Eligibility for the ERC

In the last couple years, many credit unions have been exploring whether they were eligible to claim the Employee Retention Credit (ERC) that was part of the CARES Act. This law made credits available for eligible employers whose operations were fully or partially suspended due to orders from the government. Credit unions, auditors, and third party vendors began parsing through the limitations and restrictions of the legislation and guidance.

While much of the discussion and analysis centered on eligibility factors like whether credit unions were considered essential businesses and whether state government shut-down orders caused a suspension in business operations, there was an additional limitation written into the law: the credit is not available to "the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing." Thus, whether a credit union is considered an instrumentality is an important factor in determining eligibility for the 2020 tax credit.

The IRS recently published this memorandum which analyzes the factors and ultimately concludes that "federal credit unions are instrumentalities of the United States government." In light of this, the memo states that federal credit unions may not claim the ERC "for wages paid after March 12, 2020 and before January 1, 2021."

While the memo "may not be used or cited as precedent," it does provide IRS' view on this issue. It's also important to note that this only applies to federally-chartered credit unions, not state-chartered credit unions. Another key distinction in the IRS memo is the date range. Congress passed additional legislation in late 2020 which extended the ERC into 2021 and made some changes to the eligibility rules regarding certain tax-exempt entities. The IRS memo finds that in light of those changes, federal credit unions may claim the ERC "for wages paid after December 31, 2020 and before July 1, 2021," as well as "for wages paid after June 30, 2021 and before October 1, 2021,"

In sum, the IRS memo states that federal credit unions can claim the ERC for 2021 wages but not for 2020 wages.

Credit unions should work with their auditors, legal counsel, and third-party vendors to determine how to handle the credits in light of this IRS memo. Some credit unions ultimately chose not to take the credit, others may have claimed the credit but not yet recorded the revenue.

You can read more on this from the NAFCU Compliance Team here: The Taxman Cometh | NAFCU