Essential Business- Nominal Impact

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There are two different ways for an employer to qualify for the ERC are as follows:

• The employer has a significant decline in gross receipts during a qualifying 2020 or 2021 calendar quarter when compared to a similar 2019 quarter OR
• The employer has a full or partial suspension due to governmental order during a calendar quarter between March 12, 2020, and September 30, 2021

 

A full or partial suspension is not limited to Federal government orders but also includes any State or local government orders from an appropriate governmental authority, provided they too limit commerce, travel, or group meetings due to COVID-19.  Examples of governmental orders can include any of the following:

• An order from the city’s mayor stating that all non-essential businesses must close for a specified period
• A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location
• An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period
• An order from a local health department mandating a workplace closure for cleaning and disinfecting

 

The general rule for essential businesses is that they are not considered to have a full or partial suspension if the governmental order allows the employer’s operations to remain open.  

 

The exception is if, under the facts and circumstances, more than a nominal portion of their business operations were suspended by a governmental order. 

 

The nominal determination is purely based on 2019 information, comparing 2019 gross receipts or 2019 employee hours of service performed for the business operations affected by the full or partial shutdown to the entire 2019 gross receipts or employee hours.  Suppose the 2019 gross receipts or hourly computation does not prove that it is more than a nominal division of the overall business for 2019.  In that case, a gross receipts decline of 100% between 2020 and 2019 for that portion of the employer’s shutdown operations is irrelevant.

 

Before the IRS issued Notice 2021-20, nominal was not defined.

 

The IRS has been clear that while essential businesses generally will not be deemed to have a full or partial shutdown due to orders from an appropriate governmental authority, an essential business may still qualify if it can prove that more than a nominal portion of its business operations were suspended.  How might that occur? Take a hospital as an example. Even though hospitals were deemed essential during the pandemic, parts of their operations had to be shut down.  The most common example being elective surgeries during time periods where COVID-19 peaked in specific locations.  Similarly, for manufacturing companies, it was not unusual that their manufacturing facilities to be shut down while their warehouse facilities were allowed to remain open.  You get the idea. Many essential businesses were impacted by shutdowns since March 12, 2021, even though some of their operations remained open.

 

Therefore, essential businesses must rely on the exception to prove that more than a nominal portion of their business operations were affected if they are to qualify for the ERC under a full or partial shutdown.

 

Under Notice 2021-20, solely for purposes of the ERC, a portion of an employer’s business operations will constitute more than a nominal portion of its business operations if either:

Test 1- Business Operation Impacted: The gross receipts from a portion of the business operations is 10 percent or greater than the employer’s total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or

Test 2- Employee Hours Impacted:  The hours of service performed by employees in that portion of the business is 10 percent or greater than 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).

 

 

Test 1- Business Operations Impacted

 

Requires that the gross receipts for that portion of business operations affected by the full or partial shutdown be at least 10 percent or greater of the total gross receipts. The test should be determined using the gross receipts of the same calendar quarter in 2019.

 

Let’s review some examples. Assume that an order from a local official imposed a curfew on residents that impacted a restaurant’s operating hours, from June 1 through September 31. The operating hours affect the entire business, and not just a portion (i.e. dine-in or carry-out). Therefore, the operations affected would be deemed more than nominal, as operations associated with greater than 10% of the 2019 gross receipts were impacted. 

 

Take Away: If the full or partial shutdown affects the entire business, it is deemed to affect more than a nominal portion of the business operations by default.

 

Test 1 only requires that the gross receipts from that portion of the business operations subject to shutdown be evaluated.  Assume that the business performs radiology, and while they were considered an essential business, certain procedures were suspended from March 13, 2020 through August 30, 2021.  This included mammograms, bone density screenings, and elective procedures. 

Test 2- Employee Hours Impacted

 

Test 2 provides an alternative test for “essential businesses” to prove they were more than nominally affected by a partial shutdown if the hours of service performed by employees in that portion of the business in the same calendar quarter of 2019 is 10 percent or greater of the total number of hours of service performed by all employees in the same 2019 calendar quarter. 

 

Assuming that an hourly employee does not work more than a 30-hour work week, let’s review a simplistic example.  Assume a manufacturing company’s warehouse remained open throughout the 2020 tax year, but the manufacturing line was not allowed to produce due to governmental orders from April 1 2020 through June 1, 2021. There were 5 warehouse employees and 20 employees on the production line during the 2nd quarter of 2019, and no PTO was taken during this time period.