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ERC: A closer look at partial shutdown provision

Inside Creative House/Getty Images man and woman looking at documents being presented by accountant
BREAKING DOWN ERC: There’s been a lot of confusion over whether farm businesses would qualify for the Employee Retention Credit. Recent IRS guidance helps clarify this.
Tax Tips: Look again to see if your farm business qualifies for the Employee Retention Credit.

A recent column I wrote talked about the Employee Retention Credit’s expansion throughout the 2021 tax year and looked at revenue tests for qualification. In this column, we’ll look at IRS guidance surrounding what it means for a business to be partially shut down.

In March, the IRS issued Notice 2021-20, which provided guidance for the ERC through Jan. 1, 2021. One of the most difficult aspects for taxpayers is understanding whether they had their operations fully or partially suspended, which is the other way — besides revenue decline — to qualify for the ERC.

Previous IRS guidance stated: “An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer's operations to remain open. 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 Question and Answer 11 in Notice 2021-20 provides significantly more clarity to the prior commentary from the IRS:

“Solely for purposes of this employee retention credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either the gross receipts from that portion of the business operations is not less than 10% of the total gross receipts [both determined using the gross receipts of the same calendar quarter in 2019], or the hours of service performed by employees in that portion of the business is not less than 10% 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].”

With the IRS providing a quantifiable standard to this area, taxpayers should be able to better understand and determine if they qualify under the partial shutdown test.

Arezzo is a senior tax consultant for Farm Credit East.

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