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Did your small business experience difficulties or limitations in conducting business in 2020 and 2021? While qualification criteria is complex, your small or medium-sized business may potentially be eligible for the ERC under limited commerce.
Because of how the ERC (Employee Retention Tax Credit) was initially set up, most small business owners believed their company had to experience a full shutdown or decline in gross receipts to qualify.
However, businesses that experienced a partial suspension of operations may be eligible to file under limited commerce.
Can my business still qualify for the ERC if it didn’t close?
One of the most common misconceptions about ERC? That your business had to completely close in 2020 or 2021 to qualify, a.k.a. a “full shutdown.”
The reality is that many businesses faced governmental regulations in 2020 and 2021, and in turn, had to shift to creative solutions to provide continuity of service.
Some businesses may qualify for the Employee Retention Credit even if they did not experience a full shutdown of operations. For example, a business may have had to move to teleconferencing, work-from-home, or provide drive-through offerings to continue business operations — all of which may help a business qualify.
In some cases, a “partial shutdown” has been sufficient to claim the ERC, due to new changes in IRS rules. So, even if you were originally told that you didn’t qualify for the ERC, your situation may have changed.
That’s why it’s best to get a second opinion from a company like Innovation Refunds.
New guidance from the IRS changed the rules
What’s the reason for all the confusion? Here’s a quick timeline for you:
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27, 2020, creating the ERC. This stated that businesses were eligible for the ERC if 50% of qualified wages were paid after March 12, 2020, and before January 1, 2021.
- The Consolidated Appropriations Act (CAA) was established on December 27, 2020 and made a few major changes to the ERC, most of which applied starting on January 1, 2021. This extended through the first two quarters of 2021 and increased the refund to 70% of the first $10k of qualified wages for two quarters.
- On March 11, 2021, The American Rescue Plan Act was established, which extended the rules again through 2021 and included an adjusted max credit per employee. It also said employers must have gross receipts for the quarter of less than 10% of gross receipts from the same calendar quarter in 2019.
- Notice 2021-65 (most commonly known as ‘Termination of the Employee Retention Credit’) was released on Dec. 6, 2021, which explains how the retroactive tax law change applies to employers that have based their deposits on the old law.
As you can see, there were lots of changes related to qualification for the ERC. Still need clarification? We know it’s tough to keep up. Set up a time to speak with one of our account executives today.
What is ERC ‘Limited Commerce’ defined as?
The Consolidated Appropriations Act resulted in the IRS releasing Notice 2021-49, which outlines limited commerce.
What is limited commerce? This refers to a partial suspension of business operations due to a government order. But as you’ll find out, limited commerce is an entirely different concept.
A partial suspension has occurred if:
- a.) More than a nominal portion of business operations was suspended
OR
- b.) A government order significantly affected operations
A couple of examples of limited commerce:
Supply chain disruptions
Supply chains may have been impacted, despite back orders maintaining revenue. These supply chain disruptions affected the length and number of jobs, while supply and demand inflated the cost of goods.
Disruptions beyond revenue
Fewer jobs and increased cost of goods throughout 2020 and 2021 often led to reduced profit margins. Government incentives paid employees more to stay home, leading to higher labor costs to retain workers.
Hazard pay or wage increases
The construction of hospitals and other essential infrastructure created a demand for hazard pay and higher wages on top of labor shortages.
What is the ERC Partial Suspension Test?
This test is designed to determine if governmental regulations affected your business – even in a manner that did not affect or shut down the entirety of your business.
Examples might include, but are not limited to:
- Your business operations were interrupted
- There were interruptions with your supply chain
- There was an inability to access equipment
- Your business had a limited capacity to operate
- You were unable to work with your vendors
- Your hours of operation were reduced
- Your available services offered to customers were limited or reduced
What to know about reduction in revenue requirements
One of the top misunderstandings about the ERC may have to do with revenue. Namely, a business had to experience a significant decline in revenue (or gross receipts) during 2020 and 2021 to qualify.
As it stands, a business may still qualify even if it did not experience a 50% or more decrease in revenue – based on a full or partial shutdown due to a government order that limited commerce, travel, or meetings.
This means that many of the hardships, hassles, and inconveniences you faced during COVID could make you eligible.
There’s still time to claim the ERC
Your documents must be submitted by April 15, 2024 to claim ERC funds for all eligible quarters.
Innovation Refunds’ team of independent tax attorneys can help you check your eligibility and submit your claim, and we recommend getting started today.
Ready to see if your business qualifies? Begin your application now to see if you’re eligible. Our highly-trained team and payroll and accounting integrations can help you quickly move through this process.
*Innovation Refunds works with a team of independent tax professionals. We will share your information with these professionals to evaluate and process your claims. Innovation Refunds does not provide tax or legal advice. Terms & conditions apply.
