Did you experience a full or partial shutdown during the height of the COVID-19 crisis? If it impacted your business substantially, as it did so many other businesses in almost every industry in America, you may be eligible for the Employment Retention Credit (ERC). That is, a reduction of your tax obligation – a credit – of up to $26,000 per W2 employee direct from the IRS.

If you’re not already familiar, the ERC program was created as a part of the federal government’s CARES Act, a response to the business and financial stresses caused by the COVID-19 response. As businesses were forced to close and partially close for safety reasons, the ERC program has enabled businesses that continued employing people to reclaim credit of up to $26,000 per W-2 employee.

The so-called shutdown orders put into place for safety at the time are just one aspect of the things you need to consider as you investigate the ERC. There are basically two types of shutdowns you need to think about:

Full Shutdown – these are the orders at all different levels of government that mandated certain businesses and public spaces shut their doors until further notice.

Partial Shutdown – these are shutdowns or limitations on the work businesses were able to do, such as reduction in hours, reduction in capacity, travel restrictions or issues obtaining products or supplies stemming from other businesses in their supply chain being shuttered for a time.

The Impact

The question of ERC eligibility is not quite as simple as just, “Hey, I was impacted by a government shutdown. Where’s my credit?” In fact, most applications for ERC only deal with a shutdown order as a condition of the business environment rather than an eligibility standard.

What needs to happen to establish eligibility is for a firm to maintain records showing that the business has been impacted by a level of more than ten percent. This can be proven by size or by effect, that is the impact any shutdown may have had on the business.

Test on Size

Eligibility requires that “more than a nominal” portion of your operation was interrupted by government order. That is a drop of more than ten percent of the total gross revenue compared to the same quarter in 2019 or more than ten percent fewer total employee service hours spent on a specific aspect of the business compared to the same quarter in 2019.

Test on Effect

In this version, the business muse demonstrated that the part of your business that was closed was more than ten percent of your total operation. This means that the operational responses put into effect as a direct result of the government order resulted in ten percent lower ability to provide the products and services you’d been providing before.

There are numerous methods and methodologies identified by the IRS to prove each of these issues. And once you do, you’ll have established eligibility and be able to submit your application with confidence.

A Word of Advice

Keep in mind the ERC program is new and has been changing almost constantly since it was approved and signed into law in 2020. Because of that, it is important to engage someone to help with the application who has deep experience and a practical understanding of the process.

We regularly hear from clients that their in-house tax experts or trusted CPA firms recommend working with ERC Specialists rather than attempting to handle their applications in-house because the details of the Employee Retention Credit program are so complex.

We’ve been focused on this specific program since it was passed as a part of the CARES act. As a result, it’s likely that we have navigated a situation similar to yours. We have as much experience – and success – as anyone else in the industry.

Our best advice is simple. First, be sure you understand the program requirements and how to adjust as they change. And second, be sure to utilize expert advice to handle your application.

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