How to Know If You Qualify For The ERC Suspended Operations Test (2023)

One of the biggest tax opportunities in recent years is the Employee Retention Credit, also called the ERC tax credit or ERTC. The ERC is a refundable tax credit that is designed to give financial relief to employers impacted by COVID-19. There are two ways to qualify:

  • Experiencing a decline in gross receipts in 2020 or 2021 when compared to 2019
  • Experiencing a full or partial shutdown due to a government order due to COVID-19

Although the gross revenue test is fairly straightforward, the ERC suspended operations test involves many nuances and opportunities for mistakes to occur. I decided to write a clear-cut guide for taxpayers who want to evaluate their ERC eligibility based on the suspension test.

(Video) How to Qualify for Employee Retention Credit(ERC) Using Partial Suspension Method? 2023 ERC Updates

Quick note: Don’t be fooled by big promises by greedy ERC shops

Many ERC shops have popped up and force-qualified taxpayers to receive huge ERC amounts so they get a hefty percentage. The problem is that, when the IRS inevitably starts auditing ERC claims in the coming years, taxpayers – not the ERC shops – will be responsible for justifying the ERC amount received.

If a person can’t produce clear documentation that substantiates their ERC qualification, they will be subject to penalties and fees. So, when researching your ERC eligibility, be sure to research for yourself and avoid blindly trusting a tax professional’s word that you are eligible. You don’t need to become a tax expert. But you should know enough about the ERC to make an informed decision on who to trust for ERC services.

What is the ERC suspended operations test?

The suspended operations test says that to qualify for the ERC, you must have experienced a full or partial shutdown in 2020 or 2021 due to a government order related to COVID-19.

On the surface, this sounds quite clear, but many clarifications need to be made. Let’s get started…

How is a shutdown defined for the ERC suspended operations test?

For ERTC purposes, you are considered to have experienced a shutdown when a government order specifically directed you to restrict access to your business location or forced you to reduce your level of operations comparable to 2019.

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If only a portion of your business was closed while another area remained open, you may qualify for ERC under a partial shutdown. To be considered a partial suspension of operations, the shutdown must have affected more than a nominal portion of your business.

What is a nominal portion of my business?

In Notice 2021-20 (page 28), the IRS clarifies that a shutdown fulfills the nominal portion requirement if either:

  • 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)
  • 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)

An example of the nominal portion requirement

For example, let’s say you own an auto business that is comprised of a dealership and auto repair center. In 2020 and 2021, your state’s COVID-19 guidance ordered you to close your dealership but allowed your auto repair shop to remain open as an essential service.

If your auto sales comprised 40% of your 2019 gross receipts and auto repairs made up 60% of your total revenue in 2019, you would fulfill the nominal portion requirement.

The “more than nominal impact” test for no-shutdown scenarios

If your business operations were not suspended but you made modifications in response to a direct government mandate, you can explore the nominal impact test. The IRS states that a modification is considered to have “more than a nominal impact” on business operations if it results in a 10% or more reduction in your ability to provide goods or services during normal business hours.

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Many gray areas can be tricky to navigate so it’s vital to speak with a tax professional about your specific facts and circumstances. However, here are a few caveats to note for the “more than nominal” requirement:

  • Nominal impact is tied to nominal portion: Question 17 (Example 3, 4, and 5) of IRS Notice 2021-20 determine the nominal impact in a hypothetical scenario by asking whether a nominal portion of operations was affected.
  • Modifications must have a more than nominal effect: Answer 18 in IRS Notice 2021-20 states that modifications that don’t impact operations, like masks, are considered to not have a “more than nominal” impact.
  • Guidance should be applied on a case-by-case basis: Answer 18 in Notice 2021-20 clarifies that nominal impact determinations depend on your unique circumstances and industry. Occupancy restrictions might fulfill the “more than nominal” impact test for a restaurant, but not for a retail store.

What is considered a government-ordered shutdown for the ERC suspension test?

Many taxpayers and even ERC shops have pointed to CDC guidelines and OSHA guidance as sufficient grounds to claim the ERC tax credit. However, this is incorrect.

CDC guidelines

In Notice 2021-20, Question 20 distinguishes between two business locations that have suspended operations, one due to a government mandate and the other because of CDC guidelines. The first location is described in the Notice as fulfilling the partial suspension requirement. The second location, however, is described as merely “following CDC or DHS” guidelines and is not considered to have passed the ERC suspension test.

Unless a government mandate from your state or the federal government legally requires you to comply with the CDC guidelines, it is best to avoid using CDC guidance as grounds to claim the ERC.

OSHA rules and recommendations

Similar to CDC guidelines, many taxpayers have tried to use OSHA rules to justify their ERC eligibility. However, Dan Chodan – a CPA who has dubbed this the “OSHA argument – has done a tremendous job of debunking this mistaken idea. I’ll summarize his arguments below:

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  • The COVID-19 page on the OSHA website explicitly states that OSHA recommendations are advisory in nature and informational in content. Because the ERC suspension test requires a government mandate, not merely a recommendation, the OSHA rules are not valid grounds to claim the ERC.
  • OSHA’s General Duty Clause, which states employers must furnish a safe workplace free from harm and threats, is also used to validate ERC claims. However, the General Duty Clause was created in 1970 – not in response to COVID-19 as required in IRC Section 3134(c)(2)(A)(ii)(I).

Do supplier or vendor shutdowns give me ERC eligibility?

Vendor shutdowns have an indirect impact on business operations, which has led many people to ask whether a vendor’s suspension is sufficient to qualify for the ERC. The IRS addresses supplier shutdowns in question 12 of IRS Notice 2021-20, noting that, if a business is unable to get “critical materials from its suppliers because they were required to suspend operations, the business would be considered an eligible employer.”

It’s important to understand that ERC eligibility, in this scenario, is based on your inability to obtain the supplies needed to provide goods or services. I’d highly recommend looking for an alternative supplier before using vendor suspension as grounds for your ERC eligibility. Keep any documentation or proof of your search, like emails or requests for proposals, for an alternative supplier, in case the IRS investigates your ERC claim later.

What if my operations were only suspended for part of a calendar quarter?

A popular misconception about ERC suspensions is that being suspended for any portion of a calendar quarter means you qualify for that entire quarter. This is not true.

A key consideration when determining ERC eligibility is whether or not you were able to continue comparable operations to normal conditions, despite any modifications you made to your operations.

Notice 2021-20 outlines some factors to consider when you are determining whether or not your operations are comparable:

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  • The ability to telework and continue normal operations in a location other than your office
  • The percentage of portable work which can be completed at a remote location
  • The essentiality of your physical presence to your business operations. If your presence is critical, then you are considered unable to continue comparable operations while working remotely
  • The adjustments needed to allow telework operations, which is a measure of how long it took you to shift from in-office to telework-based operations. A delay over two weeks may qualify you as “subject to a partial suspension during that transition period.”

It’s worth noting that the last factor about time to adjust to teleworking shows us that any operational pause will qualify as a partial suspension during the time of suspension only.

Look at these ERC amounts – then give us a call to check your ERC eligibility

We’ve helped numerous clients claim the ERC and, more importantly, understand how they qualified for it. Here are just some of the amounts we’ve claimed for clients through our ERC services:

  • A sports shop qualified for the first quarter of 2021 and claimed $58,255.
  • A recreation venue claimed the ERC for the second, third, and fourth quarters of 2020 and received $360, 384.26.
  • A multi-location hotel brand qualified for 2020 and the first two quarters of 2021 and claimed $484, 948.99 in ERC.

When you’re ready to talk with our professionals about your ERC eligibility, fill out our ERC questionnaire and we’ll get started.

FAQs

What qualifies as suspended operations for ERC? ›

An employer with an essential business may be considered to have a full or partial suspension of operations if the business's suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.

How do I check my ERC status? ›

To check the status of your ERTC refund, you will need to contact the IRS. You can do this by calling the IRS helpline or by visiting the IRS website. When you contact the IRS, be sure to have your Social Security number, employer identification number, and tax return information ready.

How long are ERC checks taking? ›

If ERC Claimed on an Original Form 941 Processing:

Paper-filed original Form 941s are typically processed within 3-4 months. If your originally filed Form 941 claim has not been refunded, then it is time to reach out to the IRS or ask a professional to review the Form 941 for any potential errors on your claim.

What does it mean to suspend operations? ›

verb. If you suspend something, you delay it or stop it from happening for a while or until a decision is made about it.

Who is disqualified from ERC? ›

What are Some Examples of Wages That Don't Qualify for ERCs? On August 4, 2021, the IRS issued Notice 2021-49, that states majority owners of S-corporations and C-corporations will not be eligible for Employee Retention Credits.

How do I contact the IRS about ERC? ›

If your manager is not available, contact the ERC at 866-743-5748 as soon as it is safe and practical to do so. As a reminder, the Employee Assistance Program is available for all IRS employees and their immediate family members at any time, day or night, by calling 800-977-7631 (TDD: 800-697-0353).

Where do ERC checks come from? ›

ERC credits are calculated based on the qualifying wages paid to employees during eligible employer status. For most companies taking advantage of this program, the refundable tax credits are well in excess of the payroll taxes paid by the employers.

How long does it take to get refund from ERC? ›

This is compounded by a lack of qualified IRS staff available to handle the demand, resulting in lengthy refund processing delays. If you filed an ERC refund claim, it could be a while before you see your refund. Taxpayers have reported waiting anywhere from 10–12 months for their ERC refunds, and in some cases longer.

Is ERC guaranteed? ›

We guarantee it! Under the consolidated appropriations act, ERTC was amended in 2021 to provide up to $5,000 per employee for 2020, and up to $7,000 per employee for each of the first three quarters of 2021.

Is it too late to get ERC? ›

There are only two deadlines: For all quarters in 2020, the deadline to apply for the ERC is April 15, 2024, and for all quarters in 2021, the deadline is April 15, 2025.

Is there a deadline for the ERC credit? ›

The Employee Retention Credit deadline for the 2020 tax year is April 15, 2024. This applies to all three eligible quarters: Q2, Q3, and Q4. The first quarter doesn't count since COVID-19 mandates didn't begin in the U.S. until the end of the first quarter.

Does suspension mean forever? ›

Suspension is temporary: you're taken out of school for a set length of time. Expulsion (being expelled) is permanent, and you'll have to go to a new school.

Is suspend the same as fired? ›

Key points to clarify in any employee handbook are the differences between suspension and discharge or termination. Suspension means the employee still has a job, and discharge or termination means she does not.

Does suspended mean permanently? ›

suspend verb (STOP)

to stop something from being active, either temporarily or permanently: The ferry service has been suspended for the day because of bad weather.

Will IRS audit ERC? ›

Notably, with its passage of the American Rescue Plan of 2021, Congress extended the time by which the IRS could audit ERC claims from three years to five. Unsurprisingly, despite the elongated time the IRS has been granted to perform audits of ERC claims, such audits have already begun.

Will the ERC be eliminated? ›

However, for 2021, the maximum per-employee credit amount is equal to $7,000 per eligible quarter ($10,000 in qualified wages per quarter times a 70% credit rate). Congress eliminated the ERC for most businesses after the third quarter of 2021, so the maximum credit for 2021 is generally $21,000 per employee.

Do all employees qualify for ERC? ›

Accordingly, each is eligible for the Employee Retention Credit only for wages paid to an employee that is not providing services due to either (1) a full or partial suspension of operations by governmental order, or (2) a significant decline in gross receipts.

Can I live chat with an IRS agent? ›

IRS unveils voice and chat bots to assist taxpayers with simple collection questions and tasks; provides faster service, reduced wait times | Internal Revenue Service.

Does IRS ever answer the phone? ›

You're welcome to call the main IRS number (Monday through Friday, 7 a.m. to 7 p.m. local time). The agency's average telephone service waiting time is 13 minutes during filing season (January through April) and 19 minutes off-season (May through December).

How do I get ERC retroactive? ›

Businesses can no longer pay wages to claim the Employee Retention Tax Credit, but they have until 2024, and in some instances 2025, to do a look back on their payroll during the pandemic and retroactively claim the credit by filing an amended tax return.

How much money is in the ERC program? ›

For 2021: The maximum ERC is $7,000 per employee, per quarter, for the first three quarters of the year, with a total maximum ERC of $21,000 per employee.

On what grounds can you suspend an employee? ›

You can be suspended if you are being investigated for misconduct, for health or safety reasons, for example, because you are pregnant. Suspension is often part of an organisation's disciplinary procedure, to allow an investigation to take place. Employees can be suspended for medical or health and safety reasons.

What is considered a partial shutdown? ›

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”.

Can I work elsewhere while suspended? ›

You should consider the fact that you're still bound by your contract, and you're still their employee. So, you can look for another job but don't secure employment if it breaches your contract. And if you want to take the risk, well, now you know how to apply for another job while on suspension.

Can a closed business apply for ERC? ›

Can a closed business apply for ERC? Yes, businesses that were temporarily closed can apply for the Employee Retention Credit (ERC). The ERC is designed to help businesses keep their employees on the payroll during the COVID-19 pandemic.

What is the maximum period of suspension? ›

Rule 1969, it is also clear that maximum suspension period may be 180 days.

What are the rules for suspend? ›

Take turns hanging pieces, starting with the longest pieces and working toward the shortest pieces. The first player to run out of pieces is the winner! color you no longer have, you must play a piece of that color from another player's pile or from the draw pile. If nobody has the color shown, your turn ends.

Will ERC trigger an audit? ›

One concern that has been raised is the potential for an ERC audit to trigger a tax return audit due to the crossover in the "Gross Receipts" part of the qualification test. Businesses in a regular tax examination are regularly subject to Form 941 expansion is an auditor sees an employee compensation issue.

Will the IRS audit ERC claims? ›

Notably, with its passage of the American Rescue Plan of 2021, Congress extended the time by which the IRS could audit ERC claims from three years to five. Unsurprisingly, despite the elongated time the IRS has been granted to perform audits of ERC claims, such audits have already begun.

What is the penalty for ERC audit? ›

If an employer is audited and the amount of the ERC is reduced, the penalties could range from a 20% accuracy-related penalty to a 75% penalty if the IRS asserts civil fraud by the employer. In an egregious case, the IRS could assert criminal fraud, resulting in penalties and potential imprisonment.

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