There are two ways an employer can qualify for the Employee Retention Credit (ERC). The first is to have a decline in revenue for eligible quarters in 2020 and 2021. If you do not qualify by a decline in revenue, the second qualification is your business must have a full or partial suspension. The rules on eligibility and business suspension are not always clear cut and can be ambiguous when it comes to determining full or partial suspension. The IRS website offers multiple business scenarios to help establish a business operation status. A simplified test to identify which businesses should be deemed an “eligible employer” is typically determined by two factors:
- Was the suspension because of a COVID-related government order? (and/or)
- Was the business full or partially suspended?
Businesses that were forced into shut down by the government, had to suspend operations or reduce hours will most likely qualify for the ERC. Many businesses found it necessary to change how they operated. Even a business deemed “essential” had to adjust during the pandemic by limiting occupancy. Others forced to close, like restaurants, endured a complete shutdown and eventually returned to a partial business operation by modifying their business model to offer patio dining or carry out only, and usually with limited staff.
Eligibility status becomes a bit more tangled for a business that operates in multiple regions, as the government mandates may differ within the various cities, counties, or states. For example, a business might have had a franchise open and fully operational in one area of a state; yet, have other locations that remained closed in another nearby area. In this instance, the employer would be considered partially shut down.
Most importantly, for a business to be granted “eligible employer” status, all closures or modifications must have been mandated by a city, county, state, or federal municipality.
IRS Notice 2021-20 offers more information and examples to help determine partial or full suspension status. However, it is always best to consult with a tax advisor to determine the eligibility status of a business, as well as discuss any unique circumstances or other considerations.
Author, Jeff Spiegel, CPA
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.