Your bank may be wondering if you qualify for the employee retention credit (ERTC). Making this determination requires first looking at how the credit has changed since it was signed into law March 2020 as part of the CARES Act and what the current requirements are.
For 2020, the credit provided a 50% refundable tax credit on qualified wages of an eligible employer. For eligible employers with 100 or fewer employees, all wages paid during the eligibility period qualify, capped at $10,000 per employee (and thus a maximum of $5,000 of tax credits per eligible employee).
This tax credit was modified and extended by the Consolidated Appropriations Act, 2021. The act provides that an employer will qualify for the tax credit with a decline of 20% of gross receipts in any quarter of 2021 compared with the same quarter in 2019. A taxpayer can also base the decline on their prior quarter. The tax credit was also expanded to 70% of eligible wages up to $10,000 per employee, per quarter (for the first three quarters of 2021). For employers with 500 or fewer employees, all wages paid to employees can be qualified.
Do you qualify for the employee retention credit?
So can banks qualify for the ERTC? Like many tax questions, the answer to that is a resounding “maybe.” There are two scenarios in which a bank can qualify as an eligible employer:
- If operations are fully or partially suspended by an appropriate government authority limiting commerce due to COVID-19.
- If gross receipts decline by certain thresholds. The bank will need to have a 50% reduction in 2020 gross receipts compared with the same calendar quarter in 2019 or a 20% reduction in 2021 gross receipts compared with the same calendar quarter in 2019.
For the first scenario, most banks were considered essential businesses and remained open during the pandemic; however, lobbies were often closed or had reduced hours. The questions are whether a lobby closure was due to a government authority limiting commerce and whether it was more than a nominal portion of the bank’s business. That is dependent on each bank’s unique facts and circumstances; however, most banks have determined that they did not qualify under the first scenario.
For the second scenario, banks will need to evaluate whether they had a decline of 50% or 20% of gross receipts, as appropriate. The definition of gross receipts is not entirely straightforward for banks, particularly as they relate to income from the sale of loans, securities and OREO properties. For example, when measuring gross receipts, do you consider the gross sales price on the sale of loans, securities and OREO properties, or do you look at the net gain from these activities?
Unfortunately, existing tax authority does not clearly define what is included in gross receipts. Internal Revenue Code Section 448 (and the underlying income tax regulations) offers guidance; however, this is a complex area, and each bank’s unique facts and circumstances should be addressed. A key consideration should be how your bank has measured gross receipts in prior tax years (for example, in determining overall accounting methods like cash-basis accounting).
If either of the scenarios above are satisfied, you can still claim a tax credit by amending quarterly employment tax reports. Ultimately, you should consult with your payroll provider or tax specialist.
Wipfli can help
Wipfli can help your bank determine whether you qualify for the employee retention credit. Reach out to learn more or get started.
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