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TAX CLINIC

the ERC under the suspension test re- more than a nominal impact on busi- levels of suspension, aggregated em-
quires an order, proclamation, or decree ness operations. There are two available ployers with multiple separate and dis-
from a federal, state, or local government safe harbors for demonstrating this. To tinct trades or businesses, etc.). Without
that limits commerce, travel, or group the extent an employer’s operations are clearer guidance on how to utilize the
meetings due to COVID-19. The level suspended, the employer should utilize safe harbor for these complex scenarios,
of enforcement of the government order the more-than-nominal portion safe- questions remain as to how to apply the
is irrelevant for these purposes. Notice harbor test. Under this test, the impact- test properly.
2021-20 indicates that an issuing state ed portion of an employer’s operations
or local government must have jurisdic- will be deemed “more than nominal” Test 2.b: Modification:
tion over the employer’s operations. for the quarter in which the employer is More-than-nominal effect
Satisfactory examples of a govern- testing eligibility if either: To the extent an employer’s operations
ment order include a state governor’s ■ The gross receipts from that portion are modified, the employer should utilize
mandating that all nonessential busi- of the business make up at least 10% the more-than-nominal effect safe-
nesses must close until further notice, a of the employer’s total gross receipts harbor test. Under this test, a modifica-
city mayor’s requiring all businesses to (both determined using the gross tion will have more than a nominal
limit occupancy to 50% of legal capacity, receipts from the same calendar effect if it results in a 10% or more
and a local health department’s ordering quarter in 2019); or reduction in an employer’s ability to
all establishments to close four hours ■ The hours of service performed provide goods or services in its normal
early to clean and disinfect the premises by employees in that portion of course of business.
to mitigate the spread of COVID-19. the business make up at least 10% Examples of ordered modifications
Critically, note that in each instance, of the employer’s total employee that may result in a more-than-nominal
compliance is mandatory; conversely, service hours (both determined effect (note the authors’ caution
government action that does not qualify using the service hours performed below) include:
would include a government official by employees in the same calendar ■ Requiring occupancy restrictions and
merely encouraging diligence in main- quarter in 2019). six-foot distancing; and
taining social distancing or avoiding ■ Requiring performance of services
unnecessary travel or guidance issued Example 1: A restaurant must close only on an appointment basis.
by the Centers for Disease Control and (i.e., a suspension of business) its Examples of modifications that like-
Prevention (CDC), as compliance is on-site dining due to a governmental ly do not result in a more-than-nominal
voluntary. order (test 1 met). The restaurant effect include:
It is highly recommended that is allowed to continue sales to the ■ Requiring employees and customers
employers save copies of the applicable public via carryout and delivery. Be- to wear face coverings; and
governmental orders, identify the effec- cause it can no longer offer on-site ■ Installing plexiglass or other barriers.
tive date ranges of the orders and the dining, which represented 30% of
applicable language impacting the em- the restaurant’s total gross receipts Example 2: Assume the same facts
ployer, and provide a robust narrative de- in the same quarter of 2019, a more- as Example 1, except three months
tailing the specific impacts of the order than-nominal portion of operations later under a further governmental
on their operations. As noted above, has been impacted (test 2.a met). As order (test 1 met), the restaurant
while an employer can still be eligible for both parts of the suspension test are is permitted to offer indoor dining
the ERC under the suspension test if it met after applying the appropriate service, subject to a 50% capacity
does not meet either of the safe harbors, safe harbor, the restaurant is eligible restriction (modification). This
discussed below, that scenario demands for the ERC. capacity restriction results in the
a detailed and compelling narrative that restaurant having to turn away
establishes that the government order Caution: This “lookback” test con- customers from eating indoors, and
imposed more than a nominal impact on siders historical information from 2019. indoor sales are down considerably
business operations. While at face value it seems simple, the compared with the normal course
guidance is not clear on how the fac- (25% decrease in customers served,
Test 2.a: Suspension: tors (i.e., numerator and denominator) compared with the same quarter
More-than-nominal portion should be considered for complex or- in 2019, showing a more-than-
The second part of the suspension test ganizational structures (e.g., franchises nominal effect (test 2.b met)). As
is whether the government order has in multiple jurisdictions with varying both parts of the suspension test

8 October 2022 The Tax Adviser