One of the eligibility requirements to qualify for the Employee Retention Tax Credit is if the business had to shut down or partially shut down operations during the COVID-19 pandemic. But what are the ERTC shut down requirements that eligible employers must meet in order to claim the ERTC?

Qualifying for the ERTC

The eligibility requirements for the ERTC are slightly different between the qualifying quarters of 2020 and 2021. In 2020, the eligibility requirements included:

  • Qualified wages for up to 100 full-time employees
  • A decline in gross receipts of 50% or more compared to the same quarter in 2019 or a full or partial shutdown of operations due to a government mandate

In 2021, the eligibility requirements for the first three quarters of the year included:

  • Qualified wages for up to 500 full-time employees
  • A decline in gross receipts of 20% or more compared to the same quarter in 2019 or a full or partial shutdown of operations due to a government mandate

But if your business or a portion of the business was affected by shutdowns, how do you know whether your business meets the eligibility requirements for the ERTC? There are two main ways that you can prove that shutdowns or other COVID-19 measures affected your business operations: suspension and modification.

The ERTC Suspension Tests

So what are the ERTC shut down requirements to qualify for the ERTC as a business owner, and how does the IRS measure the impact on your business? The IRS defines a suspension as an impact on a business’s hours or service capacity by means of a government order.

Businesses required to fully suspend operations during the COVID-19 pandemic qualify for the ERTC. Businesses where all or part of the business were essential during the pandemic but required to limit services or hours might qualify as a partial suspension.

When might a business qualify for a partial suspension for the ERTC?

  • Your business reduced hours or operational scale to meet government orders for social distancing.
  • Supplier shutdowns affected your essential business operations even though your business never shut down.
  • Your multiple-location business faced various degrees of shutdowns to comply with different shutdown orders in multiple states or municipalities.

You can apply for the ERTC under the suspension test, where you can prove that the government order requiring a full or partial shutdown had a more-than-nominal effect. You must prove that the gross receipts from that portion of your operations make up at least 10% of your company’s total gross receipts or that the hours of service in that section make up at least 10% of your total employee service hours.

You can also apply for the ERTC under the modification test, where you must prove a more-than-nominal effect on your ability to provide goods or services while complying with a government mandate. For example, occupancy restrictions, social distancing space, or providing appointment-only services could lead to more-than-nominal effects.

Common Issues Employers May Face in Claiming the ERTC

Some issues employers might discover when attempting to claim the ERTC based on shutdowns include:

  • Aggregation rules for large employers with over 100 or over 500 full-time employees
  • Double-dipping constraints on claiming the ERTC and wage deductions
  • Filing within the deadline to claim the ERTC with Form 941-X

Contact an Experienced Business Tax Law Firm 

To learn more about if your business qualifies with the ERTC shut down requirements, contact our team at the Dayes Law Firm in Phoenix, AZ. Call today at 800-503-2000 or contact us online to schedule a consultation with a business tax attorney.