Published August 19, 2022 – 4:17 p.m
Written by Cassidy Jacovici
The lucrative nature of the Employee Retention Tax Credit (known as ERTC or ERC) has sparked a veritable gold rush as taxpayers rush to get their share. If you’re unfamiliar with the ERTC, I recommend one of my previous articles, “Are you ignoring retention credits?” But if you have already learned about ERTC and are now looking for your qualification, then you must have heard of the ERTC Suspension Test.
There are several gray areas around certain aspects of the ERTC eligibility test that should be addressed carefully and with professional guidance, especially as the IRS has indicated it will be investigating ERTC claims in the years to come. Nonetheless, I look forward to explaining the best practices and the most appropriate interpretations of the official ERTC suspension test guidance.
What is the ERTC Suspension Test?
If you are interested in claiming the ERTC, you must first determine if you qualify. You can do this by using the gross power test or the hang test.
The gross income test compares your gross income for each calendar quarter in 2019 to the corresponding quarters in 2020 and 2021. If your 2020 gross earnings are less than 50% of the corresponding 2019 quarter, you are considered an eligible employer for ERTC . Purpose. If your 2021 gross earnings decreased by more than 20% in a quarter compared to the same quarter in 2019, you will be considered eligible for the 2021 ERTC amount for that quarter.
You can also use the suspension test to determine your ERTC eligibility. With this method, you are considered a qualifying employer if a government order specifically provides for the full or partial closure of your business. Even if you have been deemed an essential business, you may still qualify for ERTC if a government order causes you to cease more than a minor part of your business.
Nominal share vs. nominal effect?
The IRS offers you two safe havens to use when determining your ERTC eligibility with the Notice 2021-20 Suspension Test:
- – When more than the nominal share Your company is affected by a COVID-19-related official order
- — If in a government order related to COVID-19 a more than nominal effect on your business
#1: Defining a nominal part
This aspect of the ERTC suspension test applies when part, but not all, of the business is affected by a government order. IRS Notices 2021-20 includes one of the following definitions for a small portion of your business:
- 1. Gross receipts from the affected part of the business representing at least 10% of total gross receipts (calculated using gross receipts for the same quarter of 2019)
- 2. The hours worked by the employees in this part of the company account for at least 10% of the total length of service (calculated using the number of hours worked in the same quarter of 2019)
#2: Defining a nominal effect
This safe haven applies when no part of your operations have been suspended but you have still made changes to comply with a COVID-19 government order.
The safe harbor that covers this provides that a change is considered to have a “greater than nominal impact” on the employer’s business if it results in a 10% or greater reduction in the employer’s ability to provide goods or services in the workplace normal framework to provide commercial courses. There is a shortage. ,
There are other caveats to consider when estimating the nominal effect:
- The nominal part is connected with the effect of the nominal: Question 17 of IRS Notices 2021-20 (Examples 3, 4 and 5) determines the nominal impact by assessing whether a minor portion of the operation was affected.
- The changes should have more than a nominal effect: Answer 18 IRS Notice 2021-20 states that changes in business operations that do not affect business operations, such as B. Wearing a mask, no longer considered a minor impact on business operations.
- Parameters must be applied individually: Ans 18 also provides that the guidelines should be implemented on a case-by-case basis. For example, occupancy restrictions impact more than just indoor dining restaurants, but not a retailer that can accommodate customers regardless of occupancy restrictions.
Qualifying vs. non-qualifying shutdown
When discussing shutdowns for ERTC eligibility purposes, it is important that we adhere to the appropriate interpretation of the available guidance in relation to this sometimes questionable area. One aspect is clear regarding ERTC qualified shutdowns and that is must be bound by an official orderHowever, there are some misconceptions about certain types of shutdowns that are worth clearing up.
What about the CDC guidelines?
Some business owners point to the CDC guidelines as justification for their ERTC eligibility. However, in Notices 2021-20, Question 20 distinguishes between an employer operating at two locations, one subject to a government-ordered suspension and the other adjusting operations only under CDC guidelines. The example describes the company as being partially suspended as its site is subject to compulsory suspension. On the other hand, a location that is simply mentioned as “compliant with CDC or DHS guidelines” is not considered blocked.
The example in IRS Notices 2021-20 shows that it is best to avoid using CDC guidelines to apply for ERTC unless your state legally requires your business to comply with CDC guidelines . will be good.
Is the OSHA guidance sufficient?
Related to using CDC guidelines as justification for ERTC eligibility, many business owners have begun to argue that they cannot be used as a basis for applying for ERTC since OSHA regulations mandate compliance with CDC guidelines. You can rely on the OSHA regulations.
Dan Chodan, a brilliant accountant and active Twitter usershas dubbed this particular argument the “OSHA argument” and flatly dismissed it in an article Think outside the boxWhile I can’t give Dan the full respect he deserves in this article, I can highlight some of his key points for you.
before COVID-19 page The OSHA website specifically states that the OSHA recommendations are advisory in nature and informative in nature. Because the ERTC Suspension Test determines that only state-ordered closures are sufficient grounds for applying for an ERTC, OSHA recommendations cannot be used to qualify for an ERTC unless the state is required by law to be a business not required to comply with OSHA recommendations.
The downside of OSHA’s argument focuses on the General Duty Clause, which states that employers must provide a workplace free of recognized hazards that “can cause death or serious injury.” The problem with referring to the general obligation clause is that it was created as part of a 1970 law and not in response to COVID-19 as required IRC section 3134(c)(2)(a)(ii)(i),
What if my supplier or supplier is affected?
Question 12 in IRS Notices 2021-20 asks whether a company whose suppliers have been suspended is broadly considered to be suspended. The response states that if the company is “unable to obtain critical materials from its suppliers because they have had to shut down operations, then the company will be considered a qualified employer.”
I would like to emphasize that the legitimacy of this fictional company is based on its inability to receive shipments. That said, if your supplier has been suspended due to a forced closure, it is best to research an alternative supplier before relying on your initial supplier closure for your ERTC eligibility.
What about the suspended operations for the partial quarter?
Contrary to popular belief, suspending operations for less than one full calendar quarter does not entitle you to receive the full ERTC amount for that quarter. in the Note 2021-20In this article, the IRS addresses several factors that must be considered when attempting to determine whether an employer can continue to conduct comparable business. The list of factors provided that the IRS considers is not exhaustive, it includes the following:
- Your Ability to telework Continuation of operations from another location.
- Percentage of wearable work What can be done at a remote location.
- the need for your physical presence for continuous operation. If your presence is critical and operations cannot be conducted remotely, you will be deemed unable to continue comparable operations.
- Necessary adjustments for teleworking operations, if you need to adapt your operations to allow comparable remote work assignments. Any significant delay of more than two weeks in adapting and relocating your operations may be considered “subject to a partial suspension during this transition period”.
The last factor related to the telecommuting adjustments gives us an insight into whether we can justify a position being eligible for full quarter eligibility if the outage has not lasted for the full quarter. The language used expressly indicates that any business interruption caused by a teleworking adjustment is to be qualified as a partial suspension at the time of infection Only,
Be sensible when claiming ERTC
The American Rescue Plan Act added five years to the statute of limitations for evaluating payroll tax returns for which ERTC is claimed. It’s worth noting that erroneous refunds are treated by ERTC as underpayment of Social Security or Medicare taxes and are subject to evaluation.
As with any ERTC situation, it’s best to properly interpret the guidance available from the IRS and local authorities so you can avoid trouble later when the IRS begins investigating ERTC claims.
Cassidy Jakovickas, CPA, MBS Accountancy Corp. in downtown Fresno. is President and CEO of.