Think Your Essential Business is Ineligible for the ERC? Think Again.

Owners of essential businesses might assume their companies are ineligible for employee retention credits (ERC) because they neither met the revenue decline thresholds nor experienced a suspension of operations due to a government order.

However, in a little-known exception, the IRS allows essential businesses to claim ERCs if more than a “nominal portion” of a non-essential portion of their business operations was suspended by a governmental order. In Notice 2021-20, the IRS defines “nominal” as less than 10%.

This exception could apply to businesses that perform both essential and non-essential services, as well as essential businesses that were forced to reduce hours. Examples include medical facilities that could not perform elective surgeries, manufacturers that were required to close their plants but not their warehouses, and restaurants or grocery stores that were subject to curfews.

The 10% threshold is determined by comparing a non-essential business segment’s revenue and total hours worked in 2020 and 2021 calendar quarters to the same information for comparable 2019 quarters. If the non-essential business’s revenue or total hours worked are at least 10% of the respective totals, then the non-essential business segment is more than nominal. Accordingly, if during a 2020 or 2021 quarter a business segment is shut down by government order, the business qualifies for ERCs in the shutdown quarter.

As a reminder, the 2020 ERC is available for wages paid between March 12, 2020 and December 31, 2020, and the 2021 ERC is available for wages paid between January 1, 2021 and September 30, 2021 (or the entirety of 2021 for recovery startup businesses).

If you believe your essential business may qualify for this valuable payroll tax credit or want to learn more about calculating your eligibility, please contact your Grassi advisor or Robert Tobey, Tax Partner.