Act Now: Claim Your 2020 and 2021 Employee Retention Credit (ERC)Tax Planning
During much of 2020 and 2021, you may have qualified for the Employee Retention Credit (ERC).
With the ERC, you found (or could find) tax credits of up to $26,000 per employee. That’s a lot. With 10 employees, that’s $260,000.
Key point. If you have not claimed the ERC, you can amend your 2020 and 2021 payroll tax returns for the credit. (Amending the payroll is not difficult—so no sweat on that score.)
Three Ways to Qualify
- Decline in gross receipts (on a quarterly basis, by more than 50 percent in 2020 compared with 2019, and by more than 20 percent in 2021 compared with 2019)
- Government order that caused a full or partial shutdown (think physical space)
- Government order that caused more than a nominal effect (think modification of activity)
We do not cover the 50 percent or 20 percent decline in gross receipts tests in this article. No problem. We covered them in Don’t Miss Out on the Employee Retention Credit.
Here, you will learn how you can qualify for the ERC when 2020 and/or 2021 COVID-19 government orders caused your business to suffer a full or partial shutdown or to experience a modification that had more than a nominal effect on your business.
Two Types of ERC Qualifications: Receipts and Government Orders
First, if you can qualify for the ERC under the gross receipts test, go that route. It’s easy to prove. And you get the ERC for the full quarter.
With the shutdown or modification because of a government order, you get the ERC only for the days that you suffered a full or partial suspension or suffered more than a nominal effect on your business. For example, if you suffered for 27 days, you can qualify for the credit for those 27 days.
If you can’t qualify under the 50 percent or 20 percent decline in gross receipts tests, your only alternative is the government order. That’s what we explore in this article. So, let’s get started.
What Government Order Creates the ERC for You?
If you can establish that your business was fully or partially suspended because of a federal, state, or local government order, you are eligible on a day-by-day basis for the ERC during those periods of full or partial suspension. Given the possibility of tax credits equal to $5,000 per employee in 2020 and $21,000 per employee in 2021, this is worth pursuing.
Note. We are not covering the “recovery start-up business” in this article. For some insights into that ERC qualification, see Case Study: Employee Retention Credit for Start-Up Business.
Remember 2020 and 2021. It’s hard to think that your business did not suffer due to a federal, state, or local government order during this COVID-19 pandemic. Even if you are an essential business, you likely suffered to some degree.
Here’s a short list of how a government order could have caused your full or partial shutdown:
- You had to limit your hours of operation.
- You had to temporarily shut down operations.
- You had to close your workplace to some or all of your employees.
- Your employees were subject to a curfew and could not work during normal work hours.
- Your business had to shut for periodic cleaning and disinfecting.
- The government order caused a supply chain disruption that caused you to cut back operations.
Full or Partial Shutdown Safe Harbor
You likely have no trouble identifying the full shutdown caused by a federal, state, or local government order. One thing to remember, as we mentioned before: when you qualify for the ERC under the full or partial shutdown, you earn the ERC only for the shutdown period.
To determine if your business suffered a partial suspension of operations from a government order, you need to have had more than a nominal portion of your business suspended. The question: “What is a nominal portion?” Say thanks to the IRS. Rather than rely on facts and circumstances, you can rely on the IRS safe-harbor 10 percent definition of nominal portion.
It works like this.
The effect of the government order is deemed to constitute more than a nominal portion of your business operations if either
- the gross receipts from that portion of the business operations are not less than 10 percent of the total gross receipts (both determined using the gross receipts for the same calendar quarter in 2019), or
- the hours of service performed by employees in that portion of the business are 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).
For the time that you meet either the gross receipts or worker hours tests, you suffered a more-than-nominal effect on your business operations and thus qualify for the ERC.
Example. A 2020 government order requires Sam to shut down his bar and restaurant to sit-down service. Sam looks at his 2019 quarterly results and finds that his sit-down service was 73 percent of his gross receipts for that quarter. During the 61 days that Sam was shut down by this government order, he qualifies for the ERC.
Sam also could look at 2019 worker hours rather than gross receipts for that quarter. For example, say Sam had 75 employees, and 50 worked in the bar and restaurant’s sit-down service. Under this circumstance, Sam qualifies for the ERC for the 61 days that the government order was in effect.
The full or partial shutdown is about a physical space change. You can also qualify for the ERC if the government order caused a modification to your business.
Nominal-Effect Safe Harbor for a Modification to Your Business
Unlike the partial shutdown, where you can identify affected operations by physical space, the nominal-effect safe harbor comes into play when there’s a modification required by a federal, state, or local COVID-19 governmental order that has more than a nominal effect on your business operations. For example:
- The government order limited your use of the physical space (e.g., keeping people and tables six feet apart).
- The government order limited the size of gatherings, which affected your business (e.g., no more than 10 people in the store).
Here, you are faced with a facts-and-circumstances situation.
But again, you can thank the IRS for another safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.
Example. Linda’s restaurant had to reduce its dining capacity from 100 to 60 patrons because of a government order. For this period, Linda qualifies for the ERC because she suffered more than a 10 percent reduction in the restaurant’s ability to service customers.
If your business appears to qualify for the ERC but you need a more definitive answer, examine Notice 2021-20. It has many easy-to-read examples.
Notice 2021-20 makes it clear that you can qualify for the federal, state, or local government-ordered shutdown ERC during the period of shutdown when
- a nominal portion of your operations was suspended due to a governmental order (think physical space), or
- a governmental order had a more-than-nominal effect on your business operations (think modification of activity).
For the nominal-portion ERC, you can use the more than 10 percent 2019 quarterly safe-harbor calculations involving gross receipts or worker hours.
For the nominal-effect ERC, you would need to have suffered a reduction of at least 10 percent in your ability to provide goods or services in the normal course of your business.
If you meet any of these criteria for the qualifying periods of 2020 and 2021, you can amend your 941 payroll reports and claim your ERC if you did not use those wages for the Paycheck Protection Program.