Avoiding ERC Scams Part II: The Partial Shut-Down Safe Harbor

In a previous post, we pointed out that abuse of the partial shut-down (PSD) safe harbor is one of the most common ways that third-party promoters of the employee retention credit (ERC) lure taxpayers into thinking that they qualify, when in many cases, they do not. These outfits claim that the PSD safe harbor is a new way to qualify for the ERC. Upon a closer look, taxpayers will find that it can be found within the original 2020 CARES Act legislation and does not grant the immediate qualifications that some exploitative schemes hope to imply.

ln this post, we discuss the complexities of the PSD safe harbor in detail and highlight some of the misleading claims that oversimplify the guidelines. Below you will find detailed guidance based on IRS Notice 2021-20 and key questions an employer needs to answer to determine if they legitimately meet the PSD safe harbor criteria.

Quick Summary

• The PSD safe harbor is not an automatic way to qualify for the ERC if an employer fails the revenue decline tests
• The IRS has published extensive guidance on the PSD safe harbor that illustrates the complexity and the difficulty of qualifying under the safe harbor

Questions to Help Determine if You Qualify

To determine whether your business was subject to a full or partial shut-down, answer the questions below:

• Was your business declared to be an essential or non-essential business?
• Was any part of your business declared to be non-essential and forced to shut down? If so, did the portion that was shut down constitute more than a nominal portion of your business?
• Was any part of your business ordered by a government entity to be closed for a period of time during normal business hours?
• If your business was shut down by government order, were employees able to continue working remotely?
• If your business was shut down by government order, did the closure cause you to suspend business operations for some purposes but not others?
• If your business operates in multiple locales, were any of your U.S. locations forced to fully or partially close by government order?

The Detailed Guidance

Per Notice 2021-20, an eligible employer for ERC purposes is one for which “the operation of the trade or business carried on during calendar year 2020 is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.”

In ERC sales pitches, some firms almost invariably stop here. They falsely assert, for example, that if you couldn’t travel to see your customers, your customers closed, or you could only see customers via Zoom, you qualify for the ERC. In contrast to this “anything goes” approach, the IRS outlines specific criteria for what constitutes a partial shut-down in question 11 of the notice:

• Question 11: If a governmental order requires non-essential businesses to suspend operations but allows essential businesses to continue operations, is an essential business considered to have a full or partial suspension of operations due to a governmental order?
• Answer 11: An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows all the employer’s operations to remain open.

At first glance, it seems that essential businesses are shut out from the ERC. However, the IRS provides a way to qualify upon reading further in answer 11 within the notice: “However, an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.”

The notice provides a three-part test to help businesses analyze their situation. Under this fact pattern, the employer can qualify for the ERC under the PSD safe harbor if:

1. The employer maintains both essential and non-essential business operations
2. Both the essential and non-essential parts of the business are more than nominal portions of the business operations, and
3. A governmental order restricts the operations of the non-essential portion of the business, even if the essential portion of the business is unaffected.

Next Steps

In the final post of our series, we will discuss what constitutes as a nominal portion of a business’ operations. 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.

©2023

This is one in a series of related employee retention credit posts:

• Avoiding ERC Scams, Part I: The Basics
• Avoiding ERC Scams, Part III: The “More Than Nominal” Test