What You Need to Know About Partial Suspensions and ERC Eligibility

As a business owner, you never know what might disrupt your operations. Maybe the power goes out, a storm hits, or the government changes a rule on you. If something like that forces you to halt some of what you do even if just briefly, it is referred to as a "partial suspension".

Those interruptions can really mess with your eligibility for tax breaks too. The Employee Retention Credit (ERC) was supposed to help employers keep staff during COVID. But whether you qualify depends a lot on if the government ordered you to partially or fully stop workings.

This article explains how partial suspensions can impact eligibility for the Employee Retention Credit. For employers that have experienced a partial operational disruption, guidance andadvice are provided to assist with meeting ERC requirements. The goal is to help eligible organizations access this beneficial tax credit during unforeseen business interruptions so they can retain employees.

What are Partial Suspensions?

State-ordered lock downs and regulations on corporations over the course of the COVID-19 outbreak disturbed conventional work flows for many organizations. These directives compelled certain companies to shut down entirely, while forcing others to curb capacity or curtail offerings.

 Any company experiencing more than a small, or nominal, disruption to their revenue-generating activities due to these governmental orders could qualify for tax credits under the partial suspension eligibility rules.

Definition

According to recent IRS guidance, businesses can qualify for tax relief if government orders force them to significantly reduce operations. The IRS defines a sizable impact as more than 10% lower gross revenue. So if a business can show that a government order reduced more  than 10% of its total receipts, it would qualify as a partial suspension.

Causes

There are a variety of events and orders that can cause a partial suspension:

• Public health orders - Occupancy limits, closures of certain sections of a business, curfews, and other COVID-related mandates
• Transportation disruptions - Bans on non-essential travel, border closings
• Supply chain issues - Raw material shortages, vendor closures
• Power and utility failures - Weather events, blackouts
• Cyber attacks - Ransomware attacks, IT security breaches

Impact on Business Operations

A partial suspension interrupts normal business operations. Impacts may include:

• Reduced operating hours
• Limiting services or production capabilities
• Inability to obtain inventory or materials
• Decreased revenues
• Higher costs
• Administrative burdens

These disruptions can hinder a company’s ability to function and drive profits. Qualifying for tax relief programs like the ERC helps stabilize struggling businesses.

Effect on Tax Credits

The ERC offers refundable tax credits to companies that faced COVID-related declines in gross receipts or partial suspensions of operations. By documenting interruptions caused by government orders or other events, companies can potentially claim thousands of dollars in tax credits for keeping workers employed.

Understanding the link between partial suspensions and eligibility for programs like the ERC is key for businesses seeking tax relief. Thorough record-keeping provides the necessary support for successful applications.

How do Partial Suspensions Affect ERC Eligibility?

There are two main ways a partial suspension impacts a company’s eligibility for the Employee Retention Credit:

1. Qualified Wages: If a business experiences a partial suspension, it can claim the ERC on qualified wages paid to employees during the suspension period. This includes amounts paid to furloughed or idle employees due to the suspension.
2. Gross Receipts: If the partial suspension causes a significant decline in gross receipts, the company may claim the ERC based on the receipt decline rather than the duration of the suspension itself. So while a partial suspension directly connects to eligibility for the ERC,     companies can also qualify if the suspension triggers other criteria like substantial gross receipt declines.

Examples of Partial Suspension

Many companies experienced COVID-related partial suspensions that disrupted normal operations. Common examples include:

Supply Chain Disruptions

Shortages of raw goods, inventory, or other materials impacted companies across sectors. For example, a furniture manufacturer may have qualified for a partial suspension ERC claim if lumber mills and supply vendors closed, severely limiting production capacity.

Transportation Disruptions

Travel bans and border closures created transportation challenges for companies relying on shipping and logistics. For instance, an auto parts distributor may have qualified for the ERC if cross-border shipping bans caused significant inventory delays.

Local Lock downs

State and local governments issued various in-person restrictions that suspended normal business operations. For example, a fitness studio forced to stop indoor classes due to occupancy limits could qualify for the ERC.

Restricted Hours of Operation

Some government orders enforced curfews or limited operating hours for certain businesses, preventing them from being open during normal hours. For example, a restaurant that usually operated 24hours pre-pandemic may qualify if an order forced it to close overnight.

What You Need to Know to Qualify for the ERC with a Partial Suspension

Businesses must fulfill specific requirements to be eligible for the ERC with a partial suspension. Maintaining correct records and being aware of potential effects on other credits and deductions. Here, we'll go over the essential information that companies need to be mindful of to be eligible for the ERC with a partial suspension -

Record Keeping

Write down why you partially closed and what wages you paid people during that time. This helps justify asking for the credit.

Gross Receipts Tracking

You must prove sales dropped a lot (20%+) versus earlier quarters. Monitoring sales matters for possibly qualifying.

Compliance Documentation

Also maintain records related to ongoing compliance such as:

• PPP loan documentation
• Tax filings
• Furlough and remote work policies
• Hiring and termination records

Impact on Other Credits

Consult your tax advisor regarding interactions between the ERC and other relief programs like PPP loan forgiveness. Ensure documentation aligns with the guidelines.

IRS Audit Preparation

Expect the IRS to possibly audit you later about the credit. Be ready to show documents supporting your eligibility, sales, wages paid during the partial closure, etc.

Additional Factors for Qualifying

Other key considerations exist for employers qualifying for the ERC, including:

• Ownership and Control Rules differ based on type of company (corporation, partnership, etc.)
• Aggregation rules require combining commonly-owned or controlled businesses when determining gross receipt declines or the number of full-time employees

Credit Calculation

Know the maximum credit available per employee and overall credit limits per quarter when calculating potential ERC amounts

State Tax Credit Interactions

Some states like California offered complementary tax credits to the federal ERC Ensure documentation aligns with both federal and state program guidelines

Timing of the Credit

File Form 941-X to claim the ERC on an amended quarterly payroll tax return

• Deadline for 2020 credits ended on January 1, 2024
• 2021 credits must be claimed by January 1, 2025

ERC Modification Monitoring

Follow updates on the IRS website regarding policy changes Consult a tax professional to ensure your understanding is current

Consult a Tax Expert

The complexities involved with qualifying for the ERC after a partial suspension mean most businesses benefit from partnering with a tax professional. Consult an accountant or tax attorney to:

• Review your specific situation
• Identify potential credits
• Maintain updated documentation
• Maximize available relief programs
• Avoid missteps

With expert guidance, your business can feel confident pursuing eligible tax credits that support retaining your vital workforce.

In Closing

Partial suspensions became almost inevitable for many businesses during COVID-19. Understanding how these disruptions create eligibility for critical tax relief programs like the Employee Retention Credit is key to stabilizing struggling companies.

Thorough record-keeping, credit calculations, and compliance monitoring lay the ground work for successful ERC applications. Partnering with a trusted tax advisor further helps businesses navigate the complex qualification process to maximize available credits.

Arm your company with the information needed to qualify for this vital financial lifeline at a pivotal time. The steps outlined above detail exactly what employers need to know about partial suspensions and strategically pursuing ERC tax relief.

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