BLOG: My business has been suspended. Am I eligible for the ERTC?

Cassidy Jakovickas.

published on August 19, 2022 – 16:17
Written by Cassidy Jakovicas

The lucrative nature of the Employee Retention Tax Credit (known as ERTC or ERC) sparked a veritable gold rush as taxpayers rushed to get their share. If you’re unfamiliar with the ERTC, I recommend one of my previous articles, “Are You Overlooking Employee Retention Credit?” “. But, if you have ever heard of the ERTC and are now exploring your eligibility, you have probably heard of the ERTC suspension test.

There are many gray areas surrounding certain aspects of the ERTC eligibility suspension test that should be approached with caution and professional guidance, especially since the IRS has indicated that it will review applications for ERTC in the years to come. Still, I hope to clarify the best practices and most reasonable interpretations of the official guidelines regarding the ERTC suspension test.

What is the ERTC suspension test?

If you are interested in claiming the ERTC, the first step is to determine if you are qualified. You can do this using either the gross receipts test or the suspension test.

The gross receipts test compares your gross receipts for each calendar quarter in 2019 to the corresponding quarters in 2020 and 2021. For 2020, if your gross receipts are less than 50% of the corresponding 2019 quarter, you are considered an eligible employer for the ERTC. purposes. For 2021, if your gross revenue in a quarter fell by more than 20% compared to the same quarter in 2019, you are considered eligible for the 2021 ERTC amount for that quarter.

You can also use the suspension test to determine your eligibility for the ERTC. Under this method, you are considered an eligible employer if a government decree specifically regulated the total or partial closure of your business. If you were deemed an essential business, you may still qualify for ERTC if a government order required you to close more than a nominal portion of your operations.

Nominal portion versus nominal effect?

IRS Notice 2021-20 provides two safe harbors you can use to determine your ERTC eligibility using the suspension test:

  • – When more than a nominal portion of your operations are impacted by a government order related to COVID-19
  • — When a government order related to COVID-19 more than nominal effect on your transactions

#1: Define a nominal portion

This aspect of the ERTC suspension test applies when some, but not all, of your business operations have been affected by a government order. IRS Notice 2021-20 provides one of the following definitions for a nominal part of your business:

  1. 1. The gross receipts of the relevant part of the business represent at least 10% of the total gross receipts (determined using the gross receipts of the same quarter in 2019)
  2. 2. Hours of service performed by employees in this part of the business are at least 10% of total hours of service (determined using hours of service for the same quarter in 2019)

#2: Define a nominal impact

This safe harbor applies when no part of your operations have been suspended, but you have still made changes to comply with a government COVID-19 mandate.

The safe harbor that covers this provides that a change will be considered to have a “more than nominal effect” on the employer’s operations if it results in a reduction of 10% or more of the employer’s ability to provide goods or services in the normal course of business. .

There are other caveats to consider when assessing nominal impact:

  • The nominal part is linked to a nominal impact: Question 17 (examples 3, 4 and 5) of IRS notice 2021-20 determines the nominal impact by evaluating whether a nominal part of the operations has been affected.
  • Changes should have more than nominal effect: Response 18 of IRS Notice 2021-20 states that changes to business operations that do not impact operations, such as mask requirements, are not considered to have more than a nominal impact on business operations.
  • Settings must be applied individually: Answer 18 also provides that the guidelines are to be applied on a case-by-case basis. Occupancy restrictions, for example, have a more than nominal impact on a restaurant with indoor dining, but not on a retailer that can accommodate customers regardless of occupancy restrictions.

Qualifying Vs. Ineligible Stops

When discussing termination for ERTC eligibility purposes, it is essential that we stick to reasonable interpretations of the available guidance regarding this sometimes murky area. One aspect of ERTC-eligible stops is clear, and that is must be related to a government order. However, there are misnomers regarding certain types of stops that need to be clarified.

What about CDC guidelines?

Some business owners cite CDC guidelines to justify their eligibility for the ERTC. However, in Notice 2021-20, question 20 distinguishes between an employer operating two sites, one under a government-mandated suspension and the other simply adjusting operations in accordance with guidelines. from the CDC. The example depicts the business as being partially suspended due to the location under mandatory suspension. On the other hand, location noted as simply “following CDC or DHS guidelines” is not considered suspended.

The example provided in IRS Notice 2021-20 indicates that unless your state legally requires your business to follow CDC guidelines, it would be best to avoid using CDC guidelines to claim the ERTC.

Is OSHA advice sufficient?

Similar to the use of CDC guidelines as justification for ERTC eligibility, many business owners have begun to argue that because OSHA rules mandate compliance with CDC, they can rely on OSHA rules to claim ERTC.

Dan Chodan, a brilliant CPA and active Twitter userdubbed this particular argument “the OSHA argument” and thoroughly debunked it in an article on Get off the beaten track. While I can’t give Dan’s full breakdown the respect it deserves in this article, I can highlight some of his key points for you.

First the COVID-19 page on the OSHA website specifically states that OSHA’s recommendations are advisory in nature and informational in content. Because the ERTC suspension test states that only government-mandated closures are sufficient grounds to claim ERTC, OSHA recommendations cannot be used to qualify for ERTC unless a state legally requires a company to follow OSHA recommendations.

A second aspect of OSHA’s argument centers on the General Duty Clause, which states that employers must provide a workplace free from recognized hazards that will cause or “are likely to cause death or physical harm. serious”. The problem with the reference to the general obligation clause is that it was created as part of a 1970 law, and not in response to COVID-19 as required by the IRC Section 3134(c)(2)(A)(ii)(I).

What if my vendors or suppliers were impacted?

Question 12 of IRS Notice 2021-20 asks whether a business whose suppliers are suspended is, by extension, considered suspended. The response provides that, if the company is unable to “obtain critical materials from its suppliers because they have been forced to suspend operations, then the company would be considered an eligible employer”.

I want to emphasize that the eligibility of this hypothetical company is based on its inability to source. This means that, if your provider has been suspended due to a mandatory shutdown, it would be best to look for another provider before relying on your original provider’s closure for your ERTC eligibility.

What about suspended operations for a partial quarter?

Contrary to popular belief, suspending operations for less than a full calendar quarter does not entitle you to the full amount of ERTC for that quarter. In Notice 2021-20, the IRS discusses several factors that must be considered when trying to determine whether an employer can pursue comparable transactions. The list of factors provided, which the IRS says is not exhaustive, includes the following:

  • Your possibility of teleworking while continuing operations from another location.
  • The laptop work percentage which can be completed remotely.
  • The the essentiality of your physical presence to continue operations. If your presence is essential and the transactions cannot be carried out remotely, then you are considered incapable of continuing comparable transactions.
  • The necessary adjustments for telecommuting operations, if you need to adjust your operations to allow comparable operations via telecommuting. Any significant delay beyond two weeks in adjusting and moving your operations may be considered “subject to partial suspension during this transition period.”

The last factor regarding telework adjustments lets us know whether or not we can justify a position claiming eligibility for a full quarter when the operational suspension did not last for the full quarter. The language used specifically states that any operational pause caused by teleworking adjustments will be considered a partial suspension during the transition period only.

When asking for the ERTC, be reasonable

The American Rescue Plan Act extended the statute of limitations for the assessment of payroll tax returns on which ERTC is claimed to up to five years. It should be noted that incorrect ERTC refunds will be treated as underpayments of Social Security or Medicare taxes and will be subject to assessments.

Regardless of the ERTC’s position, it is best to reasonably interpret available guidance from the IRS and local authorities to avoid trouble later when the IRS begins to review ERTC claims.

Cassidy Jakovickas, CPA, is President and CEO of MBS Accountancy Corp. in downtown Fresno.

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