Qualifying for the Employee Retention Credit and Partial Shutdowns

By: Christine M. Green

Published: April 7, 2023

IRS Warnings
The IRS continues to issue warnings alerting employers to be wary of promoters aggressively pushing schemes to claim the employee retention credit (the ERC). The IRS has also added these promoter claims to its annual “Dirty Dozen” list of tax scams. Satisfying eligibility requirements is not as simple as having paid wages to employees during the pandemic. While some requirements are objective in nature, many employers feel lost when navigating whether they qualify for the ERC because of a partial suspension or shutdown of operations. Many practitioners expect the issue of partial shutdowns to be a key area the IRS will target in audits and examinations.

What is the ERC?
In broad terms, the ERC offers eligible employers, including tax-exempt organizations, a refundable credit of up to $26,000 per employee for wages paid during the combined 2020 and 2021 tax years. Congressional intent behind the ERC was to reward employers that kept employees on their payroll during the pandemic. Employers can claim the ERC by amending quarterly federal employment tax returns for 2020 and 2021, and the credit is a refundable offset to the employer’s portion of Social Security taxes.

There are two primary ways for an employer to be eligible for the ERC:

Eligibility is not related in any manner to the industry in which the employer operates. For employers that did not have a significant decline in gross receipts, many wonder whether their business is eligible due to a partial shutdown of operations.

What is a partial shutdown?
In addressing partial shutdowns, the IRS guidance does not outright define a partial shutdown, but instead offers a series of Q&As on what constitutes a full or partial shutdown, noting that this determination is based on the particular facts and circumstances. See IRS Notice 2021-20, Q&As 11 through 22. Here are the main takeaways from these Q&As regarding partial shutdowns:

Common Pitfalls
Here are some common pitfalls in qualifying for and claiming the ERC that aggressive promoters often gloss over or fail to mention:

For questions about this alert, please contact the author or the Steptoe & Johnson Taxation and Nonprofit Law Team.

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