In a Chief Counsel Advice, the IRS Chief Counsel’s Office addresses whether federal credit unions may claim the employee retention credit (ERC). (Chief Counsel Advice 202333001)
Employee retention credit.
The ERC is a refundable tax credit for businesses and tax-exempt organizations. The requirements and the amount of the available credit vary depending on the time period for which an employer claims the credit. The credit was available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before October 1, 2021 (before January 1, 2022, for recovery start-up businesses).
Generally, businesses and tax-exempt organizations that qualify are those that: (1) were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021; or (2) experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021; or (3) qualified as a recovery startup business for the third or fourth quarters of 2021. Eligible employers must have paid qualified wages to claim the credit.
Issues.
A taxpayer asked if a federal credit union may claim the ERC for:
- for wages paid after March 12, 2020, and before January 1, 2021;
- for wages paid after December 31, 2020, and before July 1, 2021; and
- for wages paid after June 30, 2021, and before October 1, 2021 (or in the case of wages paid by a federal credit union which is a recovery startup business, January 1, 2022).
Federal credit union.
The IRS concludes that federal credit unions are instrumentalities of the United States government under the factors enumerated in Rev Rul 57-128. Specifically, federal credit unions are: (1) created by federal statute; (2) further governmental purposes by serving underserved populations; (3) act as fiscal agents and depositories; (4) perform services as required by the Treasury Secretary; and (5) controlled and supervised by public authority.
501(c)(1) organization.
Code Sec. 501(c)(1) provides that any corporation organized under an Act of Congress which is an instrumentality of the U.S. is exempt from tax under Code Sec. 501(a) if it is exempt from federal income taxes under the Act of Congress as amended and supplemented before July 18, 1984.
ERC eligibility for wages paid after March 12, 2020, and before January 1, 2021.
The IRS determined that federal credit unions are not eligible to claim the ERC in this period because they are instrumentalities of the U.S. government. Section 2301(f) of the CARES Act prohibits instrumentalities of the U.S. government from claiming the credit.
ERC eligibility for wages paid after December 31, 2020, and before July 1, 2021.
The IRS found that federal credit unions were eligible to claim the ERC during this period because Section 206 of the Taxpayer Certain and Disaster Tax Relief Act of 2020 specified that the prohibition against instrumentalities of the U.S. government would not apply to organizations described in Code Sec. 501(c)(1) and exempt from tax under Code Sec. 501(a). As such, federal credit unions may claim the ERC for wages paid in this period.
ERC eligibility for wages paid after June 30, 2021, and before October 1, 2021 (or January 1, 2022 for recovery startup business).
The IRS also found federal credit unions to be eligible to claim the ERC for these periods because the prohibition against instrumentalities of the U.S. government does not apply to Code Sec. 501(c)(1) organizations and organizations exempt from tax under Code Sec. 501(a).
This article previously appeared on Checkpoint’s Payroll Update.
For further information on the ERC, see Checkpoint’s Federal Tax Coordinator ¶ H-4687.5.
