Although some organizations can receive Employee Retention Credit (ERC) on the basis of a significant decline in gross wages or qualification as a Recovery Startup Business, many qualify as a result of a partial suspension of business operations resulting from a governmental order.
Given that ERC-related legislation has altered the terms of eligibility multiple times between 2020-2021, many organizations have lingering questions about whether they qualify for a retroactive ERC claim based on a partial suspension of business operations during the COVID-19 pandemic.
As organizations sift through IRS notices and FAQs to gain clarity, one major point of confusion is the definition of “nominal impact”: a recurring term in ERC-related announcements that attempts to provide quantitative parameters for qualification.
In this article, we’ll help your organization cut through the ambiguity to understand the definitions of “partial suspension” and “nominal impact,” and determine whether your organization is eligible for a retroactive ERC claim.
Partial Suspension & “Nominal Impact”
Broadly speaking, an organization is eligible for a retroactive employee retention credit if it experienced a full or partial suspension of operations due to governmental orders that limited travel, commerce, or group meetings during the COVID-19 pandemic.
Nevertheless, some businesses that continued essential operations during a government shutdown justifiably wonder whether they still qualify for ERC. In essence, if your organization experienced a disruption in revenue-creating operations (even non-essential ones) that met or exceeded 10%, you qualify under the terms of “partial suspension.” In this case, your organization experienced something more than a “nominal impact” to business operations due to a 10% or greater reduction in total hours of operations or total revenue-creating operations. This 10% or greater threshold can also apply to impact on sales/gross receipts, but operational or hours-related disruptions are equally acceptable conditions for the partial suspension qualification. These guidelines are primarily dictated by the IRS’ Notice 2021-20.
Examples of Partial Suspension and More-Than-Nominal Impact
Using the restaurant and food retail industry as an example, let’s consider the following hypothetical scenarios to determine baseline eligibility for ERC using partial suspension qualifications.
- If a restaurant was forced to partially or wholly suspend in-restaurant dining, leaving take-out and delivery as the primary alternatives, this business could readily demonstrate a 10% or greater disruption in operations, including while social distancing measures allowed partial in-person dining.
- If a grocery store could run all essential operations during a government shutdown with the exception of a small self-service operation – like a prepared food bar –
that accounts for less than 10% of business operations, the business would not qualify for a partial suspension and the economic impact would be considered nominal.
- If a food processing plant was forced to dedicate three or more hours of normal daily business hours to adhere to new health and sanitation regulations, the business likely qualifies for ERC under the parameters of partial suspension.
Additionally, if you operated a business with multiple locations and one or more of those locations were partially or fully shut down during governmental lockdowns, your total operations were affected (partially shut down) and your business is likely eligible for a retroactive ERC claim. This also applies to members of an aggregated group, which is legally regarded as one unified employer; if one or more members’ contributions were fully or partially suspended during eligible quarters of 2020-2021, the entire entity was partially shut down.