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How credit unions can navigate the complexities of the employee retention tax credit

Oct 18, 2022

The millions of dollars available through the Employee Retention Tax Credit (ERTC) have sparked a multitude of organizations seeking to capitalize by assisting potentially qualified credit unions with claims.  

You may have recently been contacted by an unknown organization claiming your credit union qualifies for a substantial ERTC claim. Because the rules related to the ERTC are complex and have significant tax-related implications, most credit unions should seek assistance with this process, and it’s important to use caution in choosing a partner to assist with filing an ERTC claim.  

Do you qualify for the employee retention credit?

Understanding the basics of the ERTC can help you determine whether your credit union may be eligible and can help you determine if the recommended claim amount appears reasonable.   

There are two scenarios in which a credit union can qualify as an eligible employer:

  1. If operations are fully or partially suspended by an appropriate government authority limiting commerce due to COVID-19.

    Most financial institutions were considered essential businesses and remained open during the pandemic. For example, even if lobbies were closed or had reduced hours, the drive-up facilities remained open, which made it difficult to qualify under this condition. There were situations, however, where credit union branches housed within a business that had to be closed, such as a school or shopping center, could qualify under this scenario.

  2. If there is a significant decline in gross receipts, as discussed below.

The qualifications outlined by the CARES Act in 2020 allow eligibility based on a significant decline in gross receipts, defined as at least a 50% decline in gross receipts compared to the same quarter of 2019.  In 2020, the credit is for 50% of up to $10,000 in qualified wages for the year, per employee.  

While employers with more than 100 employees can claim the ERTC for 2020, qualified wages will only include wages paid to employees if they were paid to not work. Employers with less than 100 employees are not limited in that way for this credit in 2020.

The Consolidated Appropriations Act of 2021 provides that an employer can qualify for the tax credit for 2021 with decline in gross receipts of at least 20% in any of the first three quarters of 2021 compared with the same quarter in 2019. Also, the credit was expanded to 70% of eligible wages up to $10,000 per employee, per quarter (for the first three quarters of 2021). The threshold to be considered a small employer is also more generous under this law, so for 2021 those employers with 500 or fewer employees can utilize all qualified wages paid to employees – not just those wages paid to employees who did not work.

For credit unions organized as tax-exempt entities, the definition of gross receipts references Internal Revenue Code Section 6033. Per ERTC guidance from the IRS, this means “the gross amount received by the organization from all sources without reduction for any costs or expenses.” 

For credit unions, it’s important to understand that the gross receipts from the sale of assets, including loans, is not reduced for basis in those assets. This means that credit unions can have significant ERTC qualifying opportunities depending on the timing of certain financial transactions.

Selecting a trusted advisor to assist with filing an ERTC claim.

Be sure to select an advisor with established tax knowledge, experience, and integrity to assist in determining whether your credit union qualifies for the ERTC and the amount of the credit. Consider the following when selecting a partner:

  1. Look at your current relationship with the vendor: How long have they been in business? Are they an advisor you have worked with in the past? Were they referred by a trusted colleague? Do they possess knowledge specific to credit union operations? The risk of falling victim to a scam is reduced by working with established businesses that have a proven track record within the industry.
  2. Will the vendor be available to provide support in case of a future IRS audit? The IRS has indicated they will be aggressively devoting resources to auditing ERTC claims. In addition to having to repay ERTC refunds in the event your qualification is determined improper, be aware that interest and penalties are likely to be steep.
  3. Can the vendor answer questions related to your credit union’s specific circumstances? Determining eligibility requires looking into the credit union’s finances more deeply than what is publicly recognized. For example, when it comes to determining what is included in “gross receipts,” the gross sales price on the sale of loans, securities and OREO, not the gain on the sale, is included in the gross receipts.
    Depending on the activity, this could have an impact on the calculation of the percentage of gross receipts decline, which could disqualify eligibility. Since the type of activity cannot be obtained through public sources, the credit union would have to be provide this before a final determination could be made.
  4. Do the fees seem reasonable? Are the fees a percentage of the total ERTC credit? If so, there could be motivation to file claims for credits larger than what the credit union is qualified for to increase the fees paid to the vendor.
  5. Is the qualification determination sufficiently rigorous? If you’re advised that you qualify based on a government-mandated shutdown, consider whether the justification is so broad as to qualify virtually all businesses in the U.S. (e.g. business disruption based on social distancing or masking). If yes, then it is likely that the qualification argument is overly broad and warrants further consideration and review with a trusted partner.

Having a basic understanding of ERTC qualification requirements helps you assess if the recommended claims are reasonable. A trusted advisor can perform services for a reasonable fee, will provide clear and detailed answers to questions, and can offer ongoing support. Working with a trusted advisor to evaluate the ERTC could improve the financial condition of a credit union, reducing the chances of being harmed by a scam.

How Wipfli can help

If you believe you may be eligible for the ERTC or would like to discuss your unique circumstances, reach out to Wipfli. We can help you determine your eligibility for the ERTC credit and whether it makes sense for you to apply.  If you qualify the credit offers significant benefits for employers.

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Danielle M. Heidemann, CIA
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Lauren Curley, CPA, MBA
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