How to Qualify for the ERC
Like many tax laws, the rules can be complex and confusing. We've tried to break them down here for a better understanding. While the rules based on "significant decline in gross receipts" under both the CARES Act and the Relief Act are objective and fairly easy to ascertain, qualification based on a government COVID order requires a great deal of analysis and understanding of the Acts.
Partial Suspension of the Business: CARES Act Section 2301 (2020) and Relief Act Section 3134 (2021)
Whether a business is making a claim under the CARES Act (Quarters 2-4, 2020) or the Relief Act (Quarters 1-3, 2021, the term "Eligible Employer" has the same meaning when qualifying based on a government COVID order that caused a partial shutdown of the business. Therefore the analysis below applies equally to claims made under either Act.
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The Code. Both Acts use the exact same language:
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"the operation of the trade or business described in clause (i) is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19),"
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The challenge with understanding the standard is that it's very broad and the Code doesn't help us with any limiting terms (such as requiring a decline in income, for example). A "full suspension" of the business seems pretty self-explanatory; but what is a "partial" suspension? How partial does it have to be?
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The IRS To the Rescue. Yeah, we said it. The IRS has provided information in the form of IRS Letters that provide several examples of businesses that would or would not qualify based on different scenarios. Of course, the list is not exhaustive; but it gives us some context as to how it will treat the language of the Act.
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So, What Does This All Mean? The bottom line is this: in order to qualify, a business must show 1) the existence of a COVID order and specific terms of that order that apply to the business; and 2) the specific impact to the business as a direct result of the COVID order which caused a full or partial shutdown. For a partial shutdown, the impact has to be more than "nominal." Click here to see some common examples and myths about qualification.
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Get Help From a Tax Pro. We strongly urge any business wishing to make a claim to consult a tax pro like The Hooper Law Firm. We work with you to research the COVID orders and specifically discuss the impact with you to develop a basis for qualification that can be specifically articulated on the business' 941X amended return.