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Did your business face a partial shutdown due to the COVID-19 pandemic?
The impacts of shutdowns during the pandemic on business operations were massive. According to the U.S. Census Bureau, in 2020, the COVID pandemic impacted the payrolls of 45.3% of companies with employees. This breaks down to 39.2% having reduced the hours, benefits, or pay of their employees. 5.9% actually increased the hours, benefits, or pay of their employees.
While eligibility criteria is complex, in our experience, there are many businesses that didn’t realize they were under partial shutdowns – and could potentially be eligible for a payroll tax refund called the Employee Retention Credit, or “ERC”.
Before we go any further, it’s important to note that ERC qualifications are different for 2020 and 2021, which can make determining your business’ potential eligibility a difficult process.
What is a partial government shutdown and how does it affect ERC eligibility?
So, what qualifies as a “partial shutdown”?
Any limitation on the ability to perform or render services at full capacity may be considered a partial shutdown and could be a qualifying factor for receiving the ERC.
Per the IRS, an employer is eligible for the ERC if it “sustained a full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority.”
(Note: The partial shutdown qualification is just one of the three qualifications – and the only one we’ll be discussing in this article.)
How does it apply to you and your business?
For example, let’s say you ran a church and provided essential services during the pandemic. Yet, you were ordered to limit your capacity to just 50% of your worship facilities. This may meet the partial shutdown test.
Or, if you own a construction company and were forced to limit the number of crew members on a job site, you might also qualify.
It’s a simple means test that could have big implications for the financial health of your business.
What is the ERC nominal effect?
A “nominal impact” in terms of the ERC means that a business experienced more than a 10% impact on sales or hours for that part of the business.
IRS Notice 2021-20 Subsection C states that being more than the nominal impact can be established through two scenarios. Firstly, if the gross receipts generated from that specific aspect of the business are equal to or exceed 10 percent of the total gross receipts, based on the gross receipts of the corresponding calendar quarter in 2019.
Alternatively, it can be deemed significant if the number of hours worked by employees in that particular area constitutes 10 percent or more of the total hours worked by all employees in the employer's business, considering the hours of service performed by employees in the corresponding calendar quarter of 2019.
Does transitioning to remote work classify as a partial shutdown?
Businesses that had to close physical locations or operations but continued comparable operations remotely through telework are typically not considered to have experienced a partial shutdown.
Any employer claiming a partial shutdown needs to demonstrate that the portion of the business required to close was more than a nominal portion of the overall operations.
What is limited commerce?
The idea of “limited commerce” may seem daunting but can be explained as: Did governmental orders limit your commerce? Or, put another way, did it hinder your business or any potential business, such as deals, sales, or meetings?
It is not limited to Federal Government orders, but also includes any State or local government orders from an appropriate governmental authority provided they limit commerce, travel, or group meetings due to COVID-19.
Reported wages for PPP loan forgiveness
Originally, the ERC was not accessible for businesses that took part in PPP funding. This means that many employers took out PPP loans but skipped the ERC.
However, the program has undergone expansion and under new rules, eligible businesses can claim ERC and PPP. This was removed by Congress in the Consolidated Appropriations Act (CAA) of 2021. If you qualify, you may also need to provide documentation showing wages weren't claimed twice, but it still opens new options for businesses that may have been caught between the two.
So, the question at hand is this – can you report wages that qualify you for PPP loan forgiveness? Unfortunately, no.
As stated by the IRS, “Wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can’t be claimed for the ERC in any tax period.”
An eligible employer can use the wages paid to employees in periods both before and after the PPP loan covered period that is not used for PPP loan forgiveness.
Are non-profits eligible for the ERC?
If you’re an employer of a non-profit organization and were forced to temporarily close or limit services due to a government order, you may potentially qualify for the ERC. Non-profit organizations eligible for Employee Retention Credit funding include churches, schools, hospitals, and more.
How to apply for the ERC with confidence
We know that the rules, regulations, and stipulations surrounding the ERC can be confusing. Not to mention that filing it yourself can be even more frustrating.
This is why you should partner with an ERC company like Innovation Refunds. While Innovation Refunds does not provide tax or legal advice, their team of independent tax attorneys have extensive knowledge of and experience in tax code interpretation.
Check if you qualify for the ERC with Innovation Refunds today.
*Innovation Refunds works with a team of independent tax professionals. We will share your information with these professionals to evaluate and process your claims. Innovation Refunds does not provide tax or legal advice. Terms & conditions apply.