Employee Retention Credit: Partially Shut Down, Defined

Last month’s Tax Talks discussed the Employee Retention Credit’s (ERC) expansion throughout the 2021 tax year and took a look at the revenue tests for qualification. Today, we’ll take a look a closer look at IRS guidance surrounding what it means for a business to be partially shut down.

Last month the IRS issued Notice 2021-20, which provided guidance for the ERC through January 1, 2021. One of the harder aspects for taxpayers to understand is whether they had their operations fully or partially suspended, which is the other way besides the revenue decline to qualify for the ERC. Our January Tax Talks provided the IRS guidance on this issue at that time. It stated:

“An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer's operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.”

The Question and Answer 11 in Notice 2021-20 provided significantly more clarity to the prior commentary from the IRS. It states:

“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).”

With the IRS providing a quantifiable standard to this area, taxpayers will better understand and determine if they qualify under the partial shutdown test.