Book a free consultation today!
In the previous article “How to Calculate the Employment Retention Credit”, we discussed what the Employment Retention Credit (ERC) is and how to calculate this very valuable credit. In this article, we will address a business’s eligibility for the Employee Retention Credit (ERC).
As a reminder, non-profits were discussed in a previous article: “Employment Retention Credits and Non-Profits.” However, this article is focused on for-profit businesses. Note that the concepts of gross receipts reduction and partial suspension are the same for both for-profit businesses and non-profit 501(c ) organizations.
In order to receive the employee retention credit, a business must:
An activity does not qualify as a trade or business unless the business’s primary purpose is to make a profit, and the business must be carried on with regularity and continuity. Most companies have no issues meeting this requirement.
The best way to understand these limitations is to look at entities that are specifically excluded from the ERC.
Though not excluded, companies having more than 100 full-time employees for 2020, or more than 500 full-time employees for 2021 can only claim the Employee Retention Credit (ERC) to the extent of wages that were paid to employees for the time they were not working whatsoever.
If not automatically excluded, a company is eligible for the ERC if its:
For Employee Retention Credit (ERC) purposes, a significant decline in gross receipts is as follows:
If the company does not meet the gross receipts test for a quarter, it can look to the previous quarter to meet the test. This is discussed extensively in the previous article: “Gross Receipts Test for the Employment Retention Credit (ERC)." Gross receipts are a safe harbor, meaning that if a company meets this test, the IRS will not challenge its right to the credit. This is a form test, meaning it is a mechanical calculation, so a company does not need to prove the decrease in gross receipts was related to COVID-19 or any action of the government.
If a business fails the gross receipts test, it will have to prove full or partial suspension of operations. To determine a full or partial suspension of operations, a company needs to look at what government orders the company was forced to comply with. Specifically, per IRS Notice 2021-20, proclamations, or decrees, from the federal government, or any state or local government are considered to be orders from an appropriate government authority, “if they limit commerce, travel, or group meetings due to COVID-19 in a manner that affects an employer’s operation of its trade or business, including orders that limit hours of operation.”
Examples of orders that limit commerce per IRS Notice 2021-20:
Notice 2021-20 specifically notes scenarios that are not considered government orders.
A business that becomes eligible for the ERC because of a shutdown resulting from a government order can only claim the credit for wages paid during the time that the business was totally or partially suspended.
The credit is very limited if the business is attempting to meet the full suspension criteria, but companies that qualify for full suspension can likely meet the partial suspension test when they look at the effect of these orders on operations.
A good summary of the IRS’s current opinion of what partially suspended means is listed in Notice 2021-20:
“. . . a partial suspension is considered to have occurred if under the facts and circumstances, more than a nominal portion of its business operations are suspended by government order. This may occur if as a result of an order a business is required to close for a period of time during working hours, a portion of the business is limited even if others are operating at full capacity (such as a restaurant that has limited indoor seating but is able to provide full outdoor seating and takeout orders, a supplier of the business is shut down by government order and the business is unable to obtain critical goods or materials from the supplier, or a trade or business that operates in multiple jurisdictions has one location subject to a shutdown order but not others.”
Note that I have discussed partial suspension in depth in another article: “Employee Retention Credit (ERC) and Partial Suspension."
Book a free consultation today!