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In a recent legal memorandum, CCM 202333001, IRS Chief Counsel advised that federally chartered Credit Unions (FCUs) are precluded from claiming the employee retention credit (ERC) for 2020 quarters but may do so for certain 2021 quarters, assuming they are otherwise eligible. The memorandum doesn’t actually provide any new information—it simply restates existing guidance—but it may be the confidence boost many FCUs still need to file for the ERC. Additionally, the memorandum is significant for exploring the unique, dual nature of FCUs and how it impacts ERC eligibility differently in 2020 and 2021.

Have Questions? Call us for Your consultation.

The ERC: A Snapshot

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) introduced the ERC as a pandemic relief measure in March 2020. The ERC was intended to enable eligible employers to continue payroll during the COVID-19 pandemic. For many businesses, it has made the difference between shuttering and surviving.

All employers are subject to very specific eligibility criteria in order to claim the ERC. Specifically, a business may be eligible by showing one of the following:

  1. The business experienced a significant decline in gross receipts during a qualifying calendar quarter or quarters in 2020 and/or 2021 (as compared to the 2019 quarterly gross receipts).
  2. The business was a recovery start-up business in the third and fourth quarters of 2021.
  3. The business operations were fully or partially suspended due to governmental orders limiting commerce, travel or group meetings.

Federal Credit Unions and ERC

During the pandemic, FCUs were considered essential businesses, meaning they generally continued operations in some capacity. For many FCUs, though, operating during the pandemic resulted in either a significant decline in gross receipts or their mandated compliance with governmental restrictions (i.e., they were “partially suspended”).

As the IRS explained in CCM 202333001, FCUs are simultaneously instrumentalities of the federal government and also tax-exempt organizations under IRC §501(a). And as we read in CCM 202333001, this dual nature impacts FCUs’ ability to claim the ERC.  

First the IRS noted that, as originally enacted, the CARES Act, §2301(f), excluded “any agency or instrumentality” of the U.S. government or “the government of any State or political subdivision thereof,” from ERC eligibility during the period of time beginning after March 12, 2020 through December 31, 2020. Subsequently, though, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), §206, retroactively amended CARES Act, §2301. In the memorandum, the IRS states that “Section 206 of the Relief Act made retroactive amendments to section 2301 of the CARES Act but did not amend section 2301(f) for wages paid after March 12, 2020, and before January 1, 2021.”

Next, the IRS points out that the Relief Act extended the application of the ERC to qualified wages paid before July 1, 2021. Importantly, while the Relief Act echoed the government instrumentality prohibition, it went on to specify that the prohibition does not apply to organizations exempt from tax under section 501(a) of the Code. However, this Relief Act amendment was not retroactive for 2020 ERC claims.

Conclusion

The IRS concluded that:

  1. FCUs are ineligible for ERC for wages paid in 2020.
  2. FCUs that satisfy the ERC eligibility requirements may claim the ERC for wages paid in 2021.
  3. FCUs may even qualify as a recovery startup business for quarters 3 and 4 of 2021.

Again, the clarity provided in CCM 202333001 may encourage some deserving FCUs to claim ERC. Many FCUs have been less than confident in how the IRS views their dual nature in light of the CARES Act and subsequent legislative amendments pertaining to ERC.

The recent memorandum should also prompt other government instrumentalities to review their potential ERC eligibility with a tax professional. You can read more about how the Relief Act similarly expanded ERC eligibility to public colleges, universities, and hospitals in our earlier article on AskFrost: https://askfrost.com/news/what-public-colleges-universities-and-hospitals-need-to-know-about-qualifying-for-the-employee-retention-credit. Finally, any FCUs, or other government instrumentalities, that want to claim the ERC should remember that there’s still time to file—generally, 2021 quarters must be filed by April 15, 2025.

For more information or assistance, please contact our team today at (410) 497-5947 or schedule a confidential consolation here.

Footnotes

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IRS Clarifies How Federal Credit Unions’ Dual Nature Impacts ERC Eligibility

Published on
August 31, 2023
IRS Clarifies How Federal Credit Unions’ Dual Nature Impacts ERC Eligibility
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In a recent legal memorandum, CCM 202333001, IRS Chief Counsel advised that federally chartered Credit Unions (FCUs) are precluded from claiming the employee retention credit (ERC) for 2020 quarters but may do so for certain 2021 quarters, assuming they are otherwise eligible. The memorandum doesn’t actually provide any new information—it simply restates existing guidance—but it may be the confidence boost many FCUs still need to file for the ERC. Additionally, the memorandum is significant for exploring the unique, dual nature of FCUs and how it impacts ERC eligibility differently in 2020 and 2021.

Have Questions? Call Our Team Today.

The ERC: A Snapshot

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) introduced the ERC as a pandemic relief measure in March 2020. The ERC was intended to enable eligible employers to continue payroll during the COVID-19 pandemic. For many businesses, it has made the difference between shuttering and surviving.

All employers are subject to very specific eligibility criteria in order to claim the ERC. Specifically, a business may be eligible by showing one of the following:

  1. The business experienced a significant decline in gross receipts during a qualifying calendar quarter or quarters in 2020 and/or 2021 (as compared to the 2019 quarterly gross receipts).
  2. The business was a recovery start-up business in the third and fourth quarters of 2021.
  3. The business operations were fully or partially suspended due to governmental orders limiting commerce, travel or group meetings.

Federal Credit Unions and ERC

During the pandemic, FCUs were considered essential businesses, meaning they generally continued operations in some capacity. For many FCUs, though, operating during the pandemic resulted in either a significant decline in gross receipts or their mandated compliance with governmental restrictions (i.e., they were “partially suspended”).

As the IRS explained in CCM 202333001, FCUs are simultaneously instrumentalities of the federal government and also tax-exempt organizations under IRC §501(a). And as we read in CCM 202333001, this dual nature impacts FCUs’ ability to claim the ERC.  

First the IRS noted that, as originally enacted, the CARES Act, §2301(f), excluded “any agency or instrumentality” of the U.S. government or “the government of any State or political subdivision thereof,” from ERC eligibility during the period of time beginning after March 12, 2020 through December 31, 2020. Subsequently, though, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), §206, retroactively amended CARES Act, §2301. In the memorandum, the IRS states that “Section 206 of the Relief Act made retroactive amendments to section 2301 of the CARES Act but did not amend section 2301(f) for wages paid after March 12, 2020, and before January 1, 2021.”

Next, the IRS points out that the Relief Act extended the application of the ERC to qualified wages paid before July 1, 2021. Importantly, while the Relief Act echoed the government instrumentality prohibition, it went on to specify that the prohibition does not apply to organizations exempt from tax under section 501(a) of the Code. However, this Relief Act amendment was not retroactive for 2020 ERC claims.

Conclusion

The IRS concluded that:

  1. FCUs are ineligible for ERC for wages paid in 2020.
  2. FCUs that satisfy the ERC eligibility requirements may claim the ERC for wages paid in 2021.
  3. FCUs may even qualify as a recovery startup business for quarters 3 and 4 of 2021.

Again, the clarity provided in CCM 202333001 may encourage some deserving FCUs to claim ERC. Many FCUs have been less than confident in how the IRS views their dual nature in light of the CARES Act and subsequent legislative amendments pertaining to ERC.

The recent memorandum should also prompt other government instrumentalities to review their potential ERC eligibility with a tax professional. You can read more about how the Relief Act similarly expanded ERC eligibility to public colleges, universities, and hospitals in our earlier article on AskFrost: https://askfrost.com/news/what-public-colleges-universities-and-hospitals-need-to-know-about-qualifying-for-the-employee-retention-credit. Finally, any FCUs, or other government instrumentalities, that want to claim the ERC should remember that there’s still time to file—generally, 2021 quarters must be filed by April 15, 2025.

For more information or assistance, please contact our team today at (410) 497-5947 or schedule a confidential consolation here.

Footnotes