Can Banks Cash in on the Employee Retention Credit?

August 19, 2020 | Article

When the CARES Act was signed into law in March of 2020, it provided incentives to businesses to keep people employed during the COVID-19 pandemic. While the Paycheck Protection Program (PPP) loans garnered most of the headlines, the Employee Retention Credit (ERC) was introduced as an alternative to employers who didn’t meet the criteria for a PPP loan.

The Employee Retention Credit (ERC) currently provides a 50% credit on qualified wages of an eligible employer. For eligible employers with 100 or fewer employees, all wages paid during the eligibility period qualify for the ERC. For larger employers, only wages paid to employees not providing services qualify. Qualified wages are currently capped at $10,000 per employee, resulting in a maximum ERC of $5,000 for each eligible employee.

Here’s what you need to consider when it comes to the Employee Retention Credit.

Can banks take advantage of the Employee Retention Credit?
Guidance has evolved since the ERC was first released, offering an opportunity for some banks to qualify.

Is the bank an eligible employer?
Generally, banks are deemed to be operating an “essential business” during the pandemic, which makes qualifying for the credit more challenging than for businesses in other industries, such as retail stores. To qualify for the ERC, a bank must demonstrate it is an eligible employer.

There are two scenarios under which a bank can qualify to be an eligible employer.

  1. The first is a gross receipts test, in which a bank would need to have a 50% reduction in gross receipts compared to the same calendar quarter last year to qualify. This test will be extremely difficult for most banks to meet.
  2. The second scenario involves a bank having its operations fully or partially suspended by an appropriate government authority limiting commerce, travel or group meetings due to COVID-19 in a manner that affects the bank’s operations.

How does the ERC define full or partial suspension of operations?
The limited guidance available on the definition of a full or partial suspension is driven by Frequently Asked Questions (FAQs) released by the IRS. Specifically, FAQs #30 and #34 provide some guidance for banks if a similar fact pattern can be applied. However, this guidance is subject to change and, according to the IRS, cannot be relied upon by taxpayers as legal authority.

During the pandemic, many banks closed their lobbies and/or changed their available hours. Under FAQ #30, if the closure of the lobby or reduced hours were required by a government order and more than a nominal portion of the business operations were suspended, an essential business could qualify for the ERC.

A bank’s lobby is often home to many high-value services, including wealth management and financial planning, loans, lock boxes and wire transfers. As many of these services can be performed over the phone and internet, there is not a clear answer as to whether the closure of the lobby results in more than a nominal portion of a banking business being suspended. However, many banks may have numerical evidence to support taking that position. Each bank will need to review its particular facts and circumstances.

In addition, FAQ #34 lays out six fact patterns for businesses with a partial suspension of operations that qualify for the ERC. Most notable is example 4, a hospital not being able to provide elective procedures but still providing other essential services. Hospitals, like banks, are considered essential businesses. The question revolves around whether the lobby closure or reduced hours were voluntary actions or directed by a government order. Like FAQ #30, if the lobby closure or reduced hours were directed by a government order, a bank could make the argument it was partially suspended.

How does my bank claim the ERC?
The ERC is claimed on Form 941. Second quarter Form 941 filings were due on July 31 but can be amended to claim the credit. Other options exist to conserve cash now if an employer qualifies for the credit. The credit can be claimed on wages paid after March 12, 2020, through the end of the calendar year or the time frame operations were partially suspended during that period based on eligibility.

How do I know if my bank qualifies for the ERC?
There may be a position for banks to claim the ERC given the ambiguity of the ERC provisions. The IRS FAQs represent an informal interpretation by the IRS. The key factor under FAQs #30 and #34 is whether the lobby closure and/or reduction in hours was driven by a government order. Ideally, either further guidance from the IRS providing clarity or new legislation expanding the credit will reduce some of the hurdles banks face to qualify as an employer eligible to claim the ERC.

Gain maximum benefit from the Employee Retention Credit.

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