What Is the ERC Government Shutdown Test?

October 9, 2023
Dayes Law Firm

Over three years after the COVID-19 pandemic peaked in 2020, businesses’ claims for  the Employee Retention Credit (ERC) to earn back revenue are in progress.

The ERC government shutdown test is one of the two ways a business can qualify for the ERC. You might wonder how this test works if you’re a business owner. You must meet specific eligibility requirements, and Dayes Law Firm is here to break them all down for you.

What Is the ERC?

The Employee Retention Credit (ERC), a.k.a. Employee Retention Tax Credit (ERTC), is a refundable tax credit the government offers businesses that saw a significant revenue decline in 2020-2021 because of the COVID-19 pandemic. The tax credit works to reward employers for keeping employees on their payroll while the business is under financial distress. 

The ERC refunds a percentage of employee wages to employers. Employers may collect up to $10,000 of 50% of employee wages for 2020 and up to 70% for 2021. 

While this tax credit for employee retention began as a relief program through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the government has since extended the program. Now, businesses can claim the credit retroactively through Form 941-X for their 2020 wages through April 15, 2024, and their 2021 wages through April 15, 2025. 

Qualifying for the ERTC

There are two ways to meet ERC eligibility criteria. You had to have either:

  • Seen a significant decline in gross receipts compared to the corresponding quarter in 2019
  • Experienced a shutdown or suspension of operations due to a government mandate for COVID-19 safety

The government shutdown test, or ERC suspended operations test, may seem more straightforward at first if you think any disruption of regular operations could make you eligible for the ERTC. However, navigating the ERC suspension test is more complicated than some assume. 

How the Government Shutdown Test Works for Full Shutdowns

Rather than calculating gross revenue, the ERC government shutdown test asks you to prove that your business had to suspend full or partial operations in response to a government mandate. 

For example, if the government mandated that all nonessential businesses close for some time, causing you to shut down in compliance, you can qualify for the ERTC. However, if you shut down because of guidelines from the Centers for Disease Control and Prevention (CDC) or the Occupational Safety and Health Administration (OSHA), this does not count toward the government shutdown test. This is because these were guidelines or recommendations, not mandates. 

How the Government Shutdown Test Works for Partial Shutdowns

Your business didn’t have to shut down completely to be eligible for the ERC through the Employee Retention Credit suspension test. 

For example, if part of your business was essential and remained open, while another part closed, you can still claim the ERC if you prove the partial shutdown affected more than a nominal portion of your business. So, if the portion of your business that shut down contributed to more than 50% of your gross receipts in 2019, you may qualify for the ERC. 

Similarly, if you had to modify your business hours or operations, you may qualify for the ERC even if you didn’t have to shut down. To do this, you must prove the modification caused a 10% or higher loss in your revenue. 

On September 14, the IRS announced “an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program” as a result of increased fraud concerns. 

IRS Commissioner Danny Werfel noted in the announcement, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” and urged that when it comes to claiming the credit, “businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

If you work with a tax professional on your Employee Retention Tax Credit application, you’ll have the knowledge and resources of a team who thoroughly understands the ERTC and tax code on your side and will be less likely to turn in an incorrect claim to the credit.

Reach Your Potential with Experienced ERTC Attorneys

Now that you understand the ERC government shutdown test, contact ERTC attorneys to help you through this process. Here at Dayes Law Firm, our skilled ERC recovery lawyers have helped hundreds of businesses recover funds from the ERTC, and yours could be next. 

Contact 866-567-4510 for a free consultation today.