A key incentive for employers in the CARES Act was the Employee Retention Credit (ERC), which was then further enhanced by the recent Consolidated Appropriations Act, 2021 (CAA). It states that an employer is entitled to the ERC if they satisfy one of the following provisions: (1) they experienced more than a 50% reduction in gross receipts in 2020 in a calendar quarter compared with 2019 (this 50% figure drops to 20% in 2021); or (2) their business operations were fully or partially suspended by a government order imposing restrictions curbing travel, commerce, or group meetings because of the pandemic. This alert focuses on the second provision – the full or partial suspension of business operations by a government order.
The IRS has issued several FAQs on what defines “full or partial suspension of operations,” but the guidance is not definitive in some cases. For example, the term “nominal” is not defined by the IRS. What follows is a summary of nine FAQs on the topic.
A Breakdown of the IRS FAQs
According to FAQ #30, an employer that operates an essential business may be considered to have a partial suspension of operations under the following circumstances:
- More than a nominal portion of their business operations were suspended by a government order.
- The business was required to close by a government order for a period of time during normal working hours.
According to FAQ #31, an employer that operates an essential business may be considered to have a partial suspension of operations if their suppliers were forced to close by a government order. The example noted by the IRS is an auto parts manufacturing business whose supplier of raw materials is shutdown, and the manufacturer is unable to procure alternate supplies of the raw material.
According to FAQ #32, an employer that operates an essential business whose customers were forced to stay at home by a government order would not qualify as a full or partial suspension of operations. The example noted by the IRS is an automotive repair business who could stay open, but customers were told to stay at home except for essential travel, such as going to a grocery store.
According to FAQ #33, an employer that was required to close their workplace but could “continue operations comparable to its operations prior to the closure” is not considered to have been fully or partially suspended. The definition of “comparable to its operations prior” is illustrated in three examples, which are summarized below. This is considered one of the main “gray areas” of the guidance.
Example 1 in FAQ #33: The office of a software development company was required to close by a governmental order. Prior to the closure, employees generally worked from home once or twice a week, and customer meetings were held at various locations. After the government order, the company required mandatory remote work and limited customer meetings to telephone or video conferences. According to the IRS, the software company is not considered to have been fully or partially suspended because the business operations may continue in a comparable manner.
Example 2 in FAQ #33: A physical therapy facility was required to close by a governmental order. Prior to the order, none of the employees provided services remotely and all appointments, administration, and other duties were carried out at the workplace. After the government order, some services were provided online, but employees could not access specific equipment or tools typically used in therapy; as well, not all clients could be served remotely. According to the IRS, the physical therapy facility is considered to be fully or partially suspended.
Example 3 in FAQ #33: A scientific research company was required to close by a governmental order. It conducted research in a laboratory setting and through the use of computer modeling. Prior to the order, the laboratory-based research could not be conducted remotely (other than certain related administrative tasks). This computer modeling research could be conducted outside of the office, and employees often worked remotely. After the order, all employees engaged in computer modeling research were directed to work remotely. This research work is considered to be comparable to work performed prior to the order. In contrast, the employees engaged in laboratory-based work were unable to continue this type of work, except for certain admirative tasks. The company’s operations are considered to be partially suspended by the government order because the laboratory-based business operations cannot continue in a comparable manner.
FAQ #34, per the IRS, addresses a situation where an employer is required to close their workplace for certain purposes but can remain open for other limited purposes. In general, this business would be considered to have been partially suspended. However, if all of the business operations could continue, even if subject to modification (i.e. social distancing), such modification is not considered to be a partial suspension – unless the order has a more than nominal effect on its business operations. This is another one of the main areas of uncertainty in the guidance. There are six examples provided in the FAQ, which are summarized below:
Example 1 in FAQ #34: A restaurant business must close its onsite dining due to a governmental order. It is allowed to operate on a carryout, drive-through, or delivery basis. This business is considered to be partially suspended.
Example 2 in FAQ #34: Start with the same facts as Example 1, but then two months later, the restaurant is allowed to offer sit-down service in its outdoor space (but indoor dining continues to be closed). During the period that indoor dining remains closed, the business is considered to be partially suspended, because under the facts and circumstances, a more than nominal portion of its business operations (the indoor dining) remains closed due to a government order.
The following month, the order that closed down indoor dining is lifted, and indoor tables are required to be spaced six feet apart. Under the facts and circumstances, the government order restricting the spacing of tables limits its indoor dining capacity and has more than a nominal effect on its business operations. Therefore, during the period, its business operations continue to be partially suspended.
Example 3 in FAQ #34: A retail business is closed by a governmental order. The business also maintains a website through which it continues to fulfill online purchases unaffected by the order. The business is considered to have been partially suspended due to the order requiring it to close its in-person store locations.
Example 4 in FAQ #34: A hospital is considered to be an essential business under a government order with respect to its emergency department, intensive care, and other services requiring urgent medical care. However, elective and non-urgent medical procedures are prevented from being performed under the order. Although the hospital is an essential business, it is considered to have a partial suspension of operations due to the government order that prevents it from performing elective and non-urgent medical care.
Example 5 in FAQ #34: A grocery store is considered to be operating an essential business under a governmental order. However, the order requires it to discontinue self-service offerings, such as salad bars (although it may still offer prepared or prepackaged food). The store modifies its operations to close the salad bar and other self-service offerings. The order is deemed to not have a more than nominal effect on its business operations. The business is therefore not considered to be partially suspended.
Example 6 in FAQ #34: A large retailer is required to close its storefront due to a government order but is permitted to provide customers with curbside service to pick up items ordered online or by phone. During this period, the business operations are considered to have been partially suspended. Two months later, the order permits it to reopen its storefront. Restrictions of the new order require it to only permit one customer per 1,000 square feet. This restriction results in customers waiting in line a short period of time to enter the store during busy times of the week. The size of the store is large enough to accommodate all of its customers after these short waits. The government order requiring the social distancing guidelines does not have a more than nominal effect on its business operations. Therefore, during this subsequent period, the operations are not considered to be partially suspended.
According to FAQ #35, an employer that is ordered to reduce their operating hours is considered to have been partially suspended. The example provided is a food processing facility that normally operates 24 hours a day. A government order requires all such businesses to deep clean the facility once every 24 hours. In order to comply with the order, the facility operating hours are cut by five hours a day for the deep cleaning. The business is considered to have been partially suspended.
FAQ #36, per the IRS, addresses a situation where an employer operates in multiple locations and is required to suspend their operations in some jurisdictions and not others. In general, an employer who operates in a consistent manner in all jurisdictions, despite not being required, would be considered to have partially suspended operations. Therefore, the employer would be eligible for all of their operations in all locations. This is despite merely following CDC or DSH guidelines in certain jurisdictions without a government order. It is not clear of the impact, had the business not applied a uniform policy across all jurisdictions.
Example: A national retail store has operations in every state. In some jurisdictions, the stores are forced to close to walk-in customers but permitted to provide customers with curbside service for order placed online or over the phone. In other jurisdictions, the stores are not required to close. The company adopts a nationwide policy to close all stores and only operate curbside pick-up, even where not required to. The company is considered to have a partial suspension of operations and is eligible for the employee retention credit nationwide.
According to FAQ #37, if the operations of one member of an aggregated group are suspended by a government order, the operations of the other members of that same group are considered to have been fully or partially suspended.
According to FAQ #38, if an employer is subject to a government order to fully or partially suspend its business operations, and then the order is subsequently lifted, the employer is considered to have business operations that were suspended. However, remember that this is only for periods during the calendar quarters in which the business was fully or partially suspended. The employee retention credit can only be claimed for the wages paid during the period the order is enforced.
Example: An order to close all non-essential businesses from March 10 through April 30. A business subject to this order would be eligible for the credit for both the first and second quarter 2020. However, it is only for the period the order is in effect. Therefore, for the first quarter, the credit can be claimed from March 10 through March 31. And for the second quarter, the credit is available on wages paid from April 1 through April 30.
Please note, the above discussion is just for the “full or partial suspension” criteria of the ERC. A business can also become eligible for ERC based on a significant decline in quarterly gross receipts. That percentage is more than 50% for 2020 and more than 20% for 2021.
These FAQs are the only information on the ERC provided thus far by the IRS. Additional ERC guidance is expected from the IRS, and hopefully it will include how to apply the “full or partial suspension of business operations” provision. At this point, there is still uncertainty with certain aspects of the ERC, and patience is recommended until the dust settles on several of these issues. We expect the IRS to closely review amended payroll tax returns filed to claim these credits. Careful consideration of your facts and circumstances should be considered in filing for ERC credits on past or current payroll tax filings. You should consult your advisors (including legal counsel) to learn how these FAQs apply to your specific situation. You are encouraged to the read the entire document.