Guidance On The Nuances Of The ERC Partial Suspension Test

One of the ways to qualify for the ERC is through the suspended operations test, which involves a full or partial shutdown due to a government order related to the COVID-19 pandemic. However, navigating the various nuances of full and partial suspensions requires careful consideration of the specific circumstances, government mandates, and the extent to which a business is affected.

What is the ERC suspension test?

To meet the suspended operations test and be eligible for the ERC, a business must have experienced a full or partial shutdown in 2020 or 2021 due to a government order related to COVID-19.

A business is considered to have experienced a shutdown when a government order specifically directed it to restrict access to its location or forced it to reduce its level of operations compared to 2019. If only a portion of the business was closed while another area remained open, the business may qualify for the ERC under a partial shutdown. 

To be considered a partial suspension of operations, the shutdown must have affected more than a nominal portion of the business.

What is a “nominal portion of business” for ERC purposes?

In the context of ERC eligibility, a nominal portion refers to a specific threshold used to determine whether a partial suspension of a business's operations is significant enough to qualify for the Employee Retention Credit. According to the IRS Notice 2021-20, a shutdown fulfills the nominal portion requirement if either:

1. The gross receipts from that portion of the business equal 10% or more of the company’s total receipts for that quarter (when compared to 2019)
2. The hours of service performed within that portion of the business comprise 10% or more of the company’s total service hours for that quarter (when compared to 2019)

If a business meets either of these criteria, it is considered to have been affected by a partial suspension that is more than a nominal portion of the business, making it eligible for the Employee Retention Credit.

Not all guidelines meet the ERC’s government mandate requirement

It's important to note that not all guidelines or recommendations qualify as government orders for the suspended operations test. For example, CDC guidelines or OSHA recommendations, by themselves, are generally not sufficient grounds to claim the ERC unless a specific government mandate requires compliance with these guidelines.

Why CDC and OSHA directives don’t satisfy the government mandate requirement

CDC and OSHA directives do not meet the government mandate related to ERC eligibility because they are not legally binding orders specifically related to COVID-19, as required for claiming the Employee Retention Credit.

1. CDC guidelines: The Centers for Disease Control and Prevention (CDC) issues guidelines and recommendations to help businesses and individuals navigate public health concerns, including the COVID-19 pandemic. However, these guidelines are not legally binding orders, and following them does not automatically make a business eligible for the ERC. According to Notice 2021-20, unless a government mandate from a state or the federal government legally requires a business to comply with the CDC guidelines, they cannot be used as grounds to claim the ERC.
2. OSHA rules and recommendations: The Occupational Safety and Health Administration (OSHA) also provides guidelines and recommendations for businesses to maintain a safe workplace. However, like CDC guidelines, OSHA rules are advisory in nature and informational in content. The ERC suspension test requires a government mandate, not merely a recommendation. This means that OSHA rules alone are not valid grounds to claim the ERC.

Passing the suspended operations test for ERC eligibility

A partial suspension occurs when a business experiences a temporary shutdown or reduction in operations due to a government order related to COVID-19, but not all of its operations are affected. To qualify for the Employee Retention Credit (ERC) under a partial suspension, the shutdown must have impacted more than a nominal portion of the business.

When determining whether a temporary shutdown qualifies as a partial or full suspension, consider the following factors:

1. Extent of impact: Assess the portion of your business operations that were directly affected by the government order. A partial suspension means that only a segment of your business was impacted, while other areas continued to function.
2. Nominal portion requirement: A partial suspension should impact more than a nominal portion of the business. According to IRS Notice 2021-20, a shutdown fulfills this requirement if either the gross receipts from the affected portion of the business equal 10% or more of the company's total receipts for that quarter (when compared to 2019), or the hours of service performed within the affected portion of the business comprise 10% or more of the company's total service hours for that quarter (when compared to 2019).
3. Government order: Ensure that the shutdown or reduction in operations was due to a government order specifically related to COVID-19, not merely voluntary actions or following general guidelines from organizations like the CDC or OSHA.
4. Duration of the shutdown: Consider the length of time the business was affected by the government order. A temporary shutdown that impacts more than a nominal portion of the business for even a short period may qualify as a partial suspension.

Do you need help with ERC eligibility and claiming it? 

While the Employee Retention Credit offers a lucrative opportunity for businesses affected by COVID-19, it is essential to navigate the eligibility criteria carefully to avoid potential penalties and fees during future IRS audits.

At MBS Accountancy, our team of dedicated professionals is here to guide you through the process and help you determine if your business qualifies for the ERC based on either the gross receipts test or suspended operations test. We understand the importance of accurate documentation and proper claim filing, ensuring that your business receives the financial relief it deserves.

Don't leave your ERC eligibility to chance. Trust the experts at MBS Accountancy to help you understand and claim the ERC you're entitled to while avoiding potential pitfalls. Contact us today for a consultation, and let us assist you in maximizing the benefits of the Employee Retention Credit for your business.