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Employee Retention Credits (ERC) – What is a Partial Shutdown?

Posted by Jesse Ferrigno on Mar 17, 2021 10:53:40 AM

Smiling customer paying by credit card at the bakery-1

As new guidance continues to be released on the eligibility requirements for the Employee Retention Credit (“ERC”), it is important to take another look on whether your business may qualify. Some businesses are quick to conclude that they would not be eligible for the credit solely based on the gross receipts reduction test, but this is only one of the criteria for eligibility. 

The second criteria is whether the business suffered a full or partial suspension of operations in any calendar quarter in 2020 or 2021. If your business was subject to a full suspension of operations due to a government order, chances are that it’s easy to identify. What constitutes a partial shutdown, however, is far less clear. As such, this post will provide a deeper dive into what may qualify as a partial business shutdown.  If you’re looking for a quick overview of the ERC, check out our one page summary of it here.

The IRS loosely defines a business subject to a partial shutdown as one in which “more than a nominal portion of its business operations are suspended by a governmental order”. So, what qualifies as “nominal”? Luckily, the IRS recently released Notice 2021-20, which provided some guidance on the definition of nominal for purposes of the ERC, as follows:

Solely for purposes of this employee retention credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).

So how does this look in practice? Per the example provided in the IRS notice:

Employer F, a restaurant business, must close its restaurant to onsite dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. Employer F is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. On-site dining is more than a nominal portion of Employer F’s business operations. Employer F’s business operations are considered to be partially suspended because, under the facts and circumstances, more than a nominal portion of its business operations—its indoor and outdoor dining service—is suspended due to the governmental order.

In the case of this example, it would be relatively simple to support the position that indoor dining service accounts for more than 10% of gross receipts, and the restaurant would qualify for the ERC at any time these orders were in place.  The notice goes on to provide further examples – say when outdoor dining opened in the summer, but indoor dining was still closed. This would still constitute a partial shutdown based on the 10% test. Even further, when indoor dining opened, but at 50% capacity, a partial shutdown would still be likely. Main point being that there are many layers to whether or not your business may qualify. 

Let’s explore another scenario. Your business was deemed essential and was therefore never shut down by any governmental orders. Surely you won’t be able to qualify for the ERC then, right? Not necessarily. The partial shutdown can extend to a business if your suppliers were forced to suspend operations under a governmental order and were subsequently “unable to make deliveries of critical goods or materials”. The following example is provided:

Employer A operates an auto parts manufacturing business. Employer A’s supplier of raw materials is required to fully suspend its operations due to a governmental order. Employer A is unable to procure these raw materials from an alternate supplier. As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations for a period of time. Under these facts and circumstances, Employer A would be considered an eligible employer during this period because its operations have been suspended due to the governmental order that suspended operations of its supplier.

Based on this example, a business may qualify for a partial shutdown even if their operations never technically ceased. This is also an example where the definition of “nominal” is not as cut and dried – it would be difficult to apply the 10% rule highlighted above to a scenario with supplier delays. However, due to the gray nature of many of the examples provided in Notice 2021-20, it can be worth looking into. 

The IRS notice addresses twelve different scenarios for what is considered a full or partial suspension of trade or business operations, and those do not even cover all the possible situations that likely occurred over this past year. We have provided a brief overview of two of them to highlight the wide net for what may qualify. If you need some help figuring out if you qualify or how to calculate this credit, contact us

Topics: Tax Planning & Strategies, Small Business, Accounting & Auditing, Accounting and Tax Resource, COVID-19

Jesse Ferrigno

Jesse Ferrigno

Jesse is a Manager in Meaden & Moore’s Assurance Services Group with over six years of experience in public accounting. He coordinates and oversees daily fieldwork, prepares financial statements and executes various other aspects of the assurance engagement. Jesse works with a wide variety of clients in various industries including service, manufacturing, retail and construction.