The Employee Retention Credit (“ERC”), which started for wages paid after March 12,2020, and had various tax law provision changes and modifications of eligibility requirements made to it along the way, ran through September 30, 2021, for most companies. However, for a Recovery Start Up Business, eligibility ended on December 31, 2021.
The ERC is, and was, a tremendous benefit for many companies that struggled through the COVID-19 pandemic It allowed companies to receive a credit for keeping their employees employed throughout this difficult time. A company could qualify for the credit under one of the following scenarios:
- Those that experienced a significant decline in gross receipts for 2020 (greater than 50% decline), and 2021 (greater than 20% decline) in a quarter, as measured against a similar quarter in 2019 (pre-Covid 19 amounts) or
- Those that experienced a full or partial shutdown by a government authority due to being limited by commerce, travel, or restrictions on group meetings that had more than a nominal impact on their business. There were also restrictions on which employees qualified for the credit depending on the number of employees.
The ERC can be claimed on Form 941 Employer’s Quarterly Federal Tax Return. However, even though the ERC ended in 2021, there is still an opportunity to claim the ERC. The claim can be made if a company did not claim it on an originally filed Form 941 return, if the statute of limitations for that quarter in which a company would like to claim the ERC is open. The statute of limitations is generally three years from the date the taxpayer filed their tax return (typically the due date of the return).
Since the ERC started essentially in the second quarter of 2020, those Form 941 returns would have been due by July 31, 2020, Assuming the company filed their return by the due date, they would have three years to claim an ERC on an amended Form 941-X Adjusted Employer’s Quarterly Tax Return or Claim for Refund, if the Form 941s are filed timely. For purposes of the statute of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year. This means the company would have until April 15, 2024 to file any of its ERC claims for a refund for 2020, and April 15, 2025for any ERC claims for 2021. So, the opportunity to claim ERCs by a company will go away beginning in 2024, if they are eligible and haven’t claimed the ERC already.
Most companies have focused on analyzing claiming ERCs based on the significant decline in gross receipts test, since it is a bright line test. Fewer companies have focused on the full or partial shutdown due to a governmental authority that restricts commerce, travel, and group meetings that affects a business by more than a nominal amount test, because there is not as much a bright line test but tends to be based on more of subjective facts and circumstances.
However, this test for being eligible for the ERC should not be ignored if a company can’t otherwise qualify under the significant decline in gross receipts test. Although this is a more subjective facts and circumstances test, there is some Internal Revenue Service (IRS) guidance on it. A governmental order allows employers to qualify as Eligible Employers for purposes of claiming the ERC without regard to the level of enforcement of the governmental order.
Governmental orders include:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period.
- A state’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location.
- An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period.
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Whether the operations of a trade or business are considered essential or non-essential will often vary from jurisdiction to jurisdiction. An employer should determine whether it is an essential or non-essential business by referring to the governmental order affecting the employer’s operation of its trade or business.
The IRS has offered guidance regarding government shutdowns. They list examples from the IRS Frequently Asked Question on the ERC from their website FAQs: Employee Retention Credit under the CARES Act | Internal Revenue Service (irs.gov) and IRS Notice 2021-20 questions 11 – 28. The examples include questions and answers on shutdowns that include the following:
- If a governmental order causes the suppliers to an essential business to suspend their operations, is the essential business considered to have a suspension of operations?
- If a governmental order causes the customers of an essential business to stay at home is the essential business considered to have a suspension of operations?
- If a governmental order requires an employer to close its workplace, but the employer is able to continue operations comparable to its operations prior to the closure by requiring employees to telework, is the employer considered to have a suspension of operations?
- If a governmental order requires an employer to close its workplace for certain purposes, but the workplace may remain operational for limited purposes, is the employer considered to have a suspension of operations?
- Are an employer’s operations considered to be partially suspended for purposes of the Employee Retention Credit if the employer is required to reduce its operating hours by a governmental order?
- Is an employer that operates a trade or business in multiple locations and is subject to a governmental order requiring full or partial suspension of its operations in some jurisdictions, but not in others, considered to have a suspension of operations?
- If the operations of a trade or business of one member of an aggregated group are suspended by a governmental order, are the operations of that trade or business of the other members of the aggregated group considered to be fully or partially suspended for purposes of the Employee Retention Credit?
The IRS does attempt to give some bright-line guidance in IRS Notice 2021-20 question 11. The question addresses a governmental order that requires a non-essential business to suspend operations but allows essential businesses to continue operations. The question asks if an essential business is considered to have a full or partial suspension of operations due to a governmental order. The answer gives some bright line guidance on what they think is more than a nominal impact on a business. The comparison is basically the gross receipts or employee hours of the portion of the business that was shutdown compared to the total gross receipts or employee hours in the same calendar quarter in 2019. If those receipts are not less than 10% then the company would be considered fully or partially shutdown for purposes of the ERC.
For example, assume a restaurant was allowed to be open for takeout but not indoor dining, which was shut down due to government orders for the second quarter of 2020. If the total receipts in the second quarter of 2019 were $100,000, and indoor dining accounted for $60,000 of total receipts the portion of the business, that was shutdown would have accounted for 60% of total receipts in that quarter. The company would then qualify for ERC in the second quarter of 2020, because the receipts of the non-essential portion of the business was not less than 10% of total receipts.
The notice then goes on to provide examples in modifications of customer behavior that may cause a business to be considered shutdown:
- Limiting occupancy to provide for social distancing
- Requiring services to be performed only on an appointment basis (for businesses that previously offered walk-in service)
- Changing the format of service (for example, restrictions on buffet or self-serve, but not prepackaged or carry-out), or requiring employees and customers to wear face coverings
The notice however states that the mere fact that an employer must make a modification to business operations due to a governmental order does not result in a partial suspension unless the modification has more than a nominal effect on the employer’s business operations. Whether a modification required by a governmental order has more than a nominal effect on the business operations is based on the facts and circumstances. A governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10% will be deemed to have more than a nominal effect on the employer’s business operations
The notice then states that modifications altering customer behavior (for example, mask requirements or converting store aisles to one way traffic to enforce social distancing) or that require employees to wear masks and gloves while performing their duties, will not result in more than a nominal effect on the business operations.
What Does SobelCo Think?
ERC is very beneficial tax credit available to companies, and taxpayers should explore their ability to determine if their company qualifies based on the government shutdown test if the company doesn’t meet the significant decline in gross receipts test. There is still time to claim these valuable credits if a company hasn’t already done so, but time is starting to run out. Once the statute of limitations closes on filing refund claims for these credits, the opportunity is lost. Enclosed in the article is a comparison chart from the IRS for ERC from 2020 vs 2021 and modifications made through various tax law changes from the IRS website Employee Retention Credit – 2020 vs 2021 Comparison Chart | Internal Revenue Service (irs.gov)