The ERC suspension test is one way for a business to qualify for the Employee Retention Credit. The test consists of two parts, and a business must pass both in order to qualify this way.
The first part of the test is that the employer must prove that they were subject to a governmental order. This could include, but is not limited to, an order to close or a limit on how many patrons could be in an establishment.
For the second part of the test, an employer must prove that the governmental order from the first part had a nominal impact on the operations of the business, either through requiring modifications or even outright suspending them. This can be the tricky part, as a “nominal impact” is quite a subjective term and it can be difficult to prove.
Full or Partial Suspensions of Business Operations
Businesses across the country felt the effect of the coronavirus pandemic - and the governmental orders stemming from it - in a variety of ways. While some businesses underwent a full suspension of business operations, others only experienced a partial suspension.
A full suspension would mean your business was unable to provide any services at all and was, for all intents and purposes, completely closed. A partial suspension, where only a segment of your business operations were affected, is much more common. This would include things like a restaurant being unable to provide dine-in service, a limit on customers to encourage social distancing, or a manufacturer only being able to produce a small percentage of what they usually could. Depending on its nature, a partial suspension could be just as financially damaging to a business as a full suspension.
ERC Partial Suspension Test
Many employers wrongfully think “suspension of business operations” only refers to a full shutdown of their business. This is not the case. Even if the operations of your business were only partially suspended, you can still qualify to receive the ERC. So long as your business was subject to a governmental order, and the order in question caused a partial suspension of business operations, then your business will very likely qualify for the ERC.
What Types of Businesses Suspended Operations?
A multitude of businesses were forced to suspend operations during the coronavirus pandemic. Restaurants were hit especially hard, and many were forced to offer only takeout options or even close completely. Any business where a large number of people congregate were also forced to suspend operations, including gyms and movie theaters. Only businesses that were fully online were truly safe from the threat of suspending operations.
Main Reasons Why Businesses Were Suspended
Many businesses were suspended due to governmental orders. These included orders limiting the amount of patrons allowed in an establishment at one time, orders requiring citizens to stay home, and even orders forcing businesses to close completely. Businesses subject to these orders had no choice but to suspend operations, otherwise they would have faced hefty fines and, in some cases, even a loss of their business license.
Some businesses were forced to suspend operations due to factors outside of governmental orders. For example, supply chain issues caused many businesses to suspend operations when they could not get materials crucial to the operation of their business. Other businesses were forced to suspend operations due to customers not feeling safe leaving their homes. This reduction in patronage caused some businesses to become unprofitable, forcing them to suspend operations until a time when customers would return. Finally, some business owners chose to suspend operations out of a sense of responsibility to the public, feeling that they should do their part to slow the spread of the coronavirus.
Does the Suspension Have to Be Government Mandated?
To qualify for the ERC using the suspension test, the suspension does indeed have to be government mandated. Many employers may have decided to close of their own free will to protect the health of their employees and customers. While they might have felt like they did not have a choice, voluntary suspensions like this will not allow a business to pass the suspension test and qualify for the ERC.
How to Determine Whether Your Business Qualifies
As an employer, it can be very confusing finding out if your business qualifies for ERC or not, and wrongly applying for this tax credit could result in receiving an ERC audit from the IRS. The easiest and safest way to discover if you qualify is to hire an ERC consultant. This is a professional who understands the rules and regulations surrounding the ERC, and will be able to quickly determine if your business qualifies or not. It is important to be aware that there is a deadline for applying for ERC, so you should be sure to retain the services of an ERC consultant and find out if your business qualifies as soon as possible. With over 22 years of tax experience, the team at Five Star ERC Experts will work closely with you every step of the way.