Financial Institutions Will Likely Not Qualify for Employee Retention Credit
The CARES Act includes an Employee Retention Credit designed to encourage businesses affected by the COVID-19 crisis to keep employees on their payroll by offering a refundable payroll tax credit of up to $5,000 per employee to help offset salary costs if certain criteria are met. The initial guidance about this new credit was limited, but additional frequently asked questions (“FAQs”) released this week indicate that it will be very difficult for essential services, such as financial institutions, to qualify.
Which Employers are Eligible?
Eligible employers for the credit include businesses and tax-exempt organizations that either:
- Fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; OR
- Experience a significant decline in gross receipts during the calendar quarter.
Governmental entities are not eligible employers for purposes of the credit and there has been discussion about whether federal credit unions might be considered governmental entities under this exclusion.
Are Financial Institutions Really Shutdown for Purposes of Eligibility?
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.
Most, if not all, states and local municipalities 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 is further supported by the recent FAQs. FAQ #30 specifically 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 recent guidance, we believe that it is unlikely that financial institutions will qualify for the employee retention credit even if they have made significant changes to their branch operations as a result of COVID-19.
Financial institutions may still 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.
CLA is here to help you navigate the programs available to your institution during this challenging time. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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