Page 493 - TaxAdviser_2022

The suspension test overview
Credits Against Tax Under the Coronavirus Aid, Relief,
and Economic Security (CARES) Act, The ERC rules
Employee retention credit: P.L. 116-136, and Notice 2021-20, an are complex, and
Navigating the suspension employer can be eligible for the ERC guidance, while
test if it experiences a full or partial suspen-
Establishing eligibility for the employee sion or modification of operations due limited, includes
substantial warnings
retention credit (ERC) by satisfying to COVID-19-related orders from an
the business operations suspension test appropriate governmental authority.
(suspension test) is similar to ventur- This is the suspension test, and it is one for employers that
ing into remote parts of the world: The of three means for eligibility, the others aggressively interpret
payoff from a successful journey can be being relatively objective determinations the rules or fail to
tremendous, but the road is arduous. of whether a business experienced a
Complexity adds uncertainty, guidance is “significant decline” in gross receipts or conduct appropriate
lacking, and what appears to be an easy qualifies as a “recovery startup business.” due diligence before
path may lead you off a cliff. Unlike those other methods of qualify-
While the ERC program has fully ing for the ERC, the suspension test reporting the credit.
sunset, employers may still file claims is highly subjective, based on facts and
for any credits they were entitled to in circumstances, lacks a significant amount
2020 through the third quarter of 2021, of guidance, and is subject to additional For establishing that suspensions and
and interest remains strong. Like a sign limitations. To help understand the modifications of business operations
on a path warning of danger ahead, this test, it is best broken down into its have occurred, Notice 2021-20 provides
item is intended to help mitigate risk core components. employers with safe-harbor tests, as will
for those still pursuing the ERC by (1) The suspension test is a two-part test, be discussed in more detail later. For a
breaking down the suspension test into applied on a quarterly basis, in which an suspension, employers must show that
its core components and (2) shedding employer must establish: more than a nominal portion of business
light on areas to proceed with caution. 1. It is subject to a governmental order operations were affected. For a modifi-
As an aside, this is a complex analysis in effect, and cation (for example, a change made to
with many moving parts, most of which 2. The order has more than a nominal satisfy social-distancing requirements),
are beyond the scope of this discussion, impact on its business operations, employers must show that the modifica-
and consulting someone with experience either due to suspending them or tion caused more than a nominal effect
is advisable. requiring modifications to them. on business operations. It is critical to
distinguish between whether a suspen-
sion or modification has occurred in
order to apply the relevant safe-harbor
test. Employers with one or more com-
ponents of their operations suspended
or modified should strive to meet the
applicable safe harbor, as failure to do
IMAGE BY NATAPONG SUPALERTSOPHON/GETTY IMAGES employer cannot meet a safe harbor, it
so increases the risk that the IRS may
challenge their eligibility. In the event an

still may be eligible for the ERC if it can
otherwise show that the governmental
order impacted business operations more
than nominally.
Test 1: Governmental order
The first part of the suspension test is

evant governmental order. Eligibility for

October 2022 7
www.thetaxadviser.com whether the employer is subject to a rel-