In part I and part II of this series, we explored the misleading claims that might lead a business to believe they qualify for the employee retention credit (ERC) and the complexities within the partial shut-down (PSD) safe harbor.
In our experience, some third-party promoters of the ERC ignore a crucial qualifier: the “more than nominal” test. We established that the IRS Notice 2021-20 states that an employer who operates an essential business may be considered to have a partial suspension of operations if more than a nominal portion of its business operations are suspended by a governmental order. So what constitutes as a nominal portion of your business’ operations?
A “Nominal Portion”
Per the notice, a nominal portion of a business’ operations is determined by using one of two “at least 10 percent” tests:
- The gross receipts from that portion of the business operations are at least 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019).
- The hours of service performed by employees in that portion of the business is at least 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).
Of all the areas where ERC scams take aggressive positions, this is the most prominent. For example, some may claim that if a business simply installed hand sanitizer stations or made employees wear masks, the modified operations would qualify for the ERC without meeting the revenue decline criteria.
In assessing whether or not a business modified its operations sufficiently to qualify for the ERC, the IRS again uses the “more than nominal” standard. Question and answer 17 of the notice state that if an employer’s workplace is closed due to a governmental order for certain purposes but can remain open for other limited purposes, the employer’s operations would be considered to be partially suspended if these statements are both true:
- The operations that are closed are more than a nominal portion of its business operations
- The operations cannot be performed remotely in a comparable manner
Answer 17 discusses the modification of operations for essential business. “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 notice provides several examples to illustrate modifications of operations that do (or do not) constitute a PSD:
- A restaurant is closed for dine-in but not for take-out or curbside. The PSD is allowed because dine-in is more than a nominal portion of operations.
- Two months later, the same restaurant is allowed to open for sidewalk dining but not dine-in. The PSD is still allowed because dine-in is more than a nominal portion of operations.
- A clothing store’s retail storefront is closed, but online ordering and delivery is operational. The PSD is allowed because the retail storefront is more than a nominal portion of operations.
- Two months later, the same store can reopen its retail store-front but is only allowed to admit a certain number of customers. While this causes customers to wait to enter the store, all customers can be accommodated. The PSD is not allowed.
- Health Care
- A hospital’s emergency, ICU and urgent care segments are declared essential and remain open. Its elective surgery and non-urgent procedures are considered non-essential and closed. The PSD is allowed because the closed segments are more than a nominal portion of operations.
- A grocery store remains open, but the fresh salad/olive bar is shut down. The PSD is not allowed because the fresh bar is not more than a nominal portion of operations.
Impact of Modifications to Operations: More Than Nominal
Question and answer 18 indicate the factors to consider in determining whether a modification required by a governmental order has more than a nominal effect on business operations for purposes of Q/A–17.
“The types of modifications contemplated by Q/A–17 are those required by a governmental order as a condition of reopening a physical space for business or service to the public. Examples of these modifications include 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 Impact on Your Business: Ability to Provide Goods or Services
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 at least 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.
The notice states, “Modifications altering customer behavior (for example, mask requirements or making store aisles one way 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.”
Suspensions That Don’t Qualify Under the PSD Safe Harbor
Customers: An employer that suspends some or all of its operations because its customers are subject to a government order requiring them to stay at home or otherwise causing a reduction in demand for its products or services is not considered to have a full or partial suspension of its operations due to a governmental order.
Voluntary: An employer that voluntarily suspends operation of a trade or business or voluntarily reduces hours due to COVID-19 is not eligible for the ERC on the basis of a full or partial suspension of its operations.
Teleworking: If an employer’s workplace is closed by a governmental order, but the employer is able to continue operations comparable to its operations prior to the closure, including by requiring its employees to telework, then the employer’s operations are not considered to have been fully or partially suspended as a consequence of a governmental order. However, if the closure of the workplace causes the employer to suspend business operations for certain purposes but not others, it may be considered to have a partial suspension of operations due to the governmental order.
The Bottom Line
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. Ignoring this guidance, we have seen employers scammed into believing that any modification can qualify a business for the PSD safe harbor.
If you would like an honest and impartial assessment as to whether your business qualifies for the ERC under the PSD safe harbor, please contact us.
This is one in a series of related employee retention credit posts: