We discussed eligibility for the ERC in a separate article, “Eligibility for the Employment Retention Credit (ERC)” and explained the gross receipts test in detail in the article, “Gross Receipts Test for the Employment Retention Credit (ERC).”
In regards to partial suspension, a company should first determine if it meets the gross receipts test. The gross receipts test is a safe harbor test, meaning that the IRS will not argue eligibility if this test is met.
If a company cannot meet the gross receipts test, it should determine if a it can meet the partial suspension test. The partial suspension test is both a much easier as well as a much harder test to meet.
- The test is easier because a company has to only show a more than nominal effect on operations due to COVID-19. More than nominal is deemed to be 10% or greater. That is a much lower bar than for gross receipts because not only is the percentage 10% instead of 20%, but the company also does not need to show that gross receipts were reduced. It simply needs to show that sales and hours were affected by a government order related to COVID-19.
- This test is harder because, unlike the gross receipts test, a company must tie the decline in sales or hours to a government order related to COVID-19 and must be able to measure those effects.
It should be noted that this is a subjective test, meaning that the IRS can disagree with the company’s position. It is suggested that a company extensively document the effects of COVID-19 if it is going to take an Employee Retention Credit (ERC) on the basis of it being partially suspended.
The first step in determining partial suspension is to look for government orders related to COVID-19. Most companies should talk to their HR department to determine what rules they complied with during qualified periods during the pandemic. Companies should also look to city orders and other rules that they followed during the pandemic. For a further discussion on government orders, see the article, “Eligibility for the Employment Retention Credit (ERC).”
The IRS has listed its current views of partial suspension in IRS Notice 2021-20.
In this document, the IRS states:
“. . . If all, or all but a nominal portion, of an employer’s business operations may continue, but the operations are subject to modification due to a governmental order (for example, to satisfy distancing requirements), such a modification of operations is considered to be a partial suspension of business operations due to a governmental order if the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances.”
“. . . 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 percent will be deemed to have more than a nominal effect on the employer’s business operations.”
“. . . For example, occupancy restrictions at a restaurant with indoor dining service may result in an actual, and more than nominal, reduction of the restaurant’s ability to service customers; however, an occupancy restriction at a retailer with sufficient physical space to accommodate its customers regardless of the restriction will likely not result in an actual, and more than nominal, reduction of the retailer’s ability to provide goods to its customers.”
IRS Examples of Partial Suspension of Operations:
In IRS Notice 2021-20, the IRS gives examples of what does or does not constitute a partial suspension of business operations. What has to be considered and proved to qualify for the Employment Retention Credits (ERC) is that a COVID-19 governmental order has had a more than nominal effect on a business. As noted above, a nominal effect means a 10% or more effect on sales or hours.
- A restaurant has to close indoor dining, resulting in a more than nominal effect on operations. That is a partial suspension.
- A restaurant can have indoor dining, but it must space seats 6-feet apart, having a more than nominal effect on operations. That is a partial suspension.
- A retailer has to close its storefront, but its online operations are functioning. Closing the storefront has caused a more than nominal effect on operations. That is a partial suspension.
- A large retailer has to close its shops but can have curbside service, resulting in a more than nominal effect on operations. This is a partial suspension.
- A grocery store has to close its self-serve salad bar so instead offers pre-packaged salads. Unless the store can show a more than nominal effect on operations, this in and of itself would not qualify as a partial suspension.
- A large retailer can open its storefront but can only admit a specific number of customers into the store per 1,000 square feet. If the size of the retailer’s storefront is large enough to accommodate customers for only a short wait during busy hours, that is not a partial suspension, unless the retailer can prove a more than nominal effect on business.
There are multiple examples, but they all have the same rational. If a company has had to change the way it does business because of a governmental order related to COVID-19, and that order restricted a company’s ability to operate and has had a more than nominal effect on operations, that is considered to be a partial suspension.
I discuss factors to consider when determining partial suspension in another article, “Factors to Consider when Considering Partial Suspension.”
We expect these credits to be audited, so documentation and doing these tests in a timely manner is important. This topic is discussed in the article, “Which Documents to Retain for the Employee Retention Credit (ERC)”.
Partial suspension can be difficult to determine and to measure. When considering the challenges of proving partial suspension to the IRS, you might find the following article helpful: “Why Hire Galileo Hunt for the Employment Retention Credit”.