ERC -- Full or Partial Suspension of Trade or Business Operation

One element that can qualify a taxpayer for the Employee Retention Credit (“ERC”) is to experience a full or partial suspension of business operations due to a governmental order.  Some situations are clear cut while others are in a gray zone.

When a business is required to suspend operations by a governmental order, the taxpayer clearly qualifies for the ERC; but what about those businesses that are allowed to operate during a governmental shut-down due to being deemed essential?  In that situation, non-essential activities of such businesses may be experiencing a partial suspension due to the limitation of certain activities or limitation of hours of operations.  Further, certain businesses may be indirectly affected by a governmental order although they are allowed to operate. It depends on whether these suspended activities make up more than a nominal portion of the business.  In questions 11 and 18 of Notice 2021-20, the IRS references ‘nominal’ to be less than 10% of either the total gross receipts of the business operations or the total hours of service performed by all employees.   

Facts and circumstances need to be considered in determining whether a business is partially suspended. Here’s a short list of examples and the status of each:

1. An employer’s suppliers cannot deliver critical goods due to a full or partial shutdown impacting the employer’s business operations. FULL OR PARTIAL SUSPENSION
2. An employer’s office, closed due to governmental orders yet operating effectively teleworking, is not considered fully suspended. Aspects of the business that cannot be performed via teleworking involve a nominal part of the business. NO PARTIAL SUSPENSION
3. When a governmental order closes one aspect of a business allowing other functions to continue, but the operating functions comprise only a nominal portion of the business, the employer is partially shut down. For example, in the restaurant industry, in-person dining was fully suspended but takeout was allowed. PARTIAL SUSPENSION
4. An employer allowed to continue to operate during a governmental shutdown order but has to suspend a nominal part of its business is not considered partially suspended. For example, a grocery store that is fully operational, but that can no longer offer a self-serve salad bar to customers. NO PARTIAL SUSPENSION
5. An employer that is allowed to continue to operate during a governmental order but has to suspend a more-than-nominal segment of its business is considered partially suspended. For example, a hospital facility that does remain open but cannot perform elective surgeries.  PARTIAL SUSPENSION
6. An employer, such a food processing plant, is required to devote several hours a day to cleaning due to enforced health regulations. PARTIAL SUSPENSION

Other items to consider are as follows: Many businesses operate in multiple locations.  When one or more locations are considered fully or partially shut down while others are open, the employer as a whole is considered partially shut down. The same is true for members of an aggregated group.  The aggregated group is treated as one employer and when one member is fully or partially suspended, this applies to the group in the entirety.

Notice 2021-20 provides many examples when a business is or is not considered fully or partially suspended. When more than a nominal component of a business has been impacted directly or indirectly due to a governmental shutdown order the employer may very well qualify for the ERC for the period of enforcement.  Remember: Each situation is unique; facts and circumstances dictate whether a business is fully or partially suspended – speak to your advisors.