How to Determine a Full or Partial Suspension of Operations (FPSO)
Full or Partial Suspension of Operations (FPSO)
One of the two main ways a business can qualify to claim the Employee Retention (ERC) is based on a Full or Partial Suspension of Operations (FPSO). If an employer’s operations were fully or partially suspended by mandatory government orders due to COVID-19 in 2020 and/or the first 3 quarters of 2021, the business may qualify for the ERC.
A full suspension of operations is rather easy to identify (think of a bowling alley or gym that was required to close its doors early in the pandemic), and these businesses are generally eligible to claim the ERC for at least the duration of time when they were fully suspended. A partial suspension of operations, on the other hand, consists of mandatory government restrictions that applied to a business at a time when it was otherwise permitted to operate. For instance, if a business was permitted to operate but was subject to social distancing or capacity restrictions that modified its normal operations, or telework restrictions that significantly hampered its ability to operate in a manner comparable to pre-pandemic, a partial suspension has likely occurred.
Determining an Eligible Partial Suspension
Importantly, not every business affected by government orders is considered to have experienced a partial suspension. In order for an employer to be eligible on this basis, the relevant government orders must have caused more than a nominal effect to the employer’s operations.
The Internal Revenue Service (IRS), which administers the ERC program, describes this requirement as follows in Q&A 17 of Notice 2021-20:
“If an employer’s workplace is closed due to a governmental order for certain purposes, but the employer’s workplace may remain open for other limited purposes, the employer’s operations would be considered to be partially suspended if, under the facts and circumstances, the operations that are closed are more than a nominal portion of its business operations and cannot be performed remotely in a comparable manner. If all, or all but a nominal portion, of an employer’s business operations may continue, but the operations are subject to modification due to a governmental order (for example, to satisfy distancing requirements), such a modification of operations is considered to be a partial suspension of business operations due to a governmental order if the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances. See additional considerations for a description of factors that may be used for determining if a modification required by a governmental order has more than a nominal effect on business operations.”
Q&A 17 (referenced above) provides a number of examples of employers that would or would not be considered partially suspended.
The first example deals with Employer F, a restaurant business that was required by governmental orders to close its restaurant to onsite dining but was allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. Since on-site dining constitutes more than a nominal portion of Employer F’s business operations, Employer F’s business operations are considered to be partially suspended.
Another example given is of Employer H, a hospital, which is considered “essential” under a governmental order with respect to its emergency department, intensive care, and other services for urgent medical conditions. However, the governmental order prohibited Employer H from performing elective and non-urgent medical procedures. Operations related to elective and non-urgent medical procedures are more than a nominal portion of Employer H’s business operations. Even though Employer H is an essential business, it’s still considered partially suspended due to the governmental order that prevents Employer H from performing elective and non-urgent medical procedures.
For other examples, see Notice 2021-20, Q&A 17.
Determining a More Than Nominal Effect
While the definition of “more than nominal” is somewhat ambiguous, the IRS has provided a safe harbor on which employers can rely in determining whether a more than nominal partial suspension has occurred. Q&A 11 of IRS Notice 2021-20 sets forth this safe harbor:
“Solely for purposes of this employee retention credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).”
Accordingly, per the safe harbor an employer is considered to have suffered more than a nominal effect if mandatory government orders caused the suspension of a portion of its operations that accounted for at least 10% of either the business’s total gross receipts or the business’s total number of employee service hours – both measured with reference to the corresponding calendar quarter of 2019.
Q&A 18 of Notice 2021-20 provides (in relevant part):
“Whether a modification required by a governmental order has more than a nominal effect on the business operations is based on the facts and circumstances. A governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent will be deemed to have more than a nominal effect on the employer’s business operations. For example, occupancy restrictions at a restaurant with indoor dining service may result in an actual, and more than nominal, reduction of the restaurant’s ability to service customers; however, an occupancy restriction at a retailer with sufficient physical space to accommodate its customers regardless of the restriction will likely not result in an actual, and more than nominal, reduction of the retailer’s ability to provide goods to its customers.”
Q&A 18 then proceeds to caution employers regarding certain effects that will not constitute more than a nominal effect:
“Modifications altering customer behavior (for example, mask requirements or making store aisles one way to enforce social distancing) or that require employees to wear masks and gloves while performing their duties will not result in more than a nominal effect on the business operations.”
Unsure If Your Business Qualifies?
The ERC is a complex program, and many employers are unsure whether they qualify – especially when it comes to analyzing partial suspensions of operations. Fortunately, ERTC Funding is here to help! We’ve assisted many clients with determining their eligibility to claim the ERC based on Full or Partial Suspension of Operations (FPSO), a Significant Decline in Gross Receipts (SDGR), or as a Recovery Start-up Business (RSB) – and we would love to help you!
ERTC Funding’s ERC professionals, tax experts and legal counsel can help evaluate whether or not your business qualifies for the ERC and assist with the claiming process. Our proprietary ERC allocation/optimization software can also help ensure that, if your business is eligible, no available funds are left on the table! As an added bonus, due to the oftentimes-significant delays in IRS processing of ERC claims, ERTC Funding also offers upfront financing options that may be available if your business needs the money now.