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are met after applying the appro- count as qualified wages those wages claims and subsequent amendments
priate safe harbor, the restaurant is for the period that the order was in to repay, costs to defend the position
eligible for the ERC. effect. For example, an employer’s upon audit or in court, and the actual
operations may have been temporar- repayment. Further, it is possible that
Caution: The mere existence of ily suspended for two weeks in the the ERC audit might not conclude
a modification, including occupancy second quarter of 2020. Only wages until after the statute of limitation
restrictions and requiring appointments pertaining to that two-week period has expired for the income tax return
for services, is insufficient. An employer can be treated as qualified, not all on which the employer appropriately
must still establish that the mandated wages for the second quarter of did not claim deductions for wages
modification had more than a nominal 2020. giving rise to the credit, as required
effect on business operations, which can ■ Limitation on trade or business: The by CARES Act, Section 2301(e), and
be demonstrated by showing a 10% or law and guidance appear to limit Sec. 3134(e). In this case, the employer
more reduction in the employer’s ability qualified wages to the specific trade would be unable to amend its income
to provide goods or services in its nor- or business that was suspended, and tax return to take the deductions,
mal course of business. Unfortunately, not all wages paid to all employees of meaning it effectively paid tax on a
Notice 2021-20 fails to provide quan- the employer if the employer com- credit it had to repay. Employers should
tifiable parameters by which this 10% prises multiple trades or businesses. consider these risks carefully and
reduction can be measured. As stated Unfortunately, available guidance determine whether they are comfort-
above, without clearer guidance, ques- does not appear to contemplate this able with the levels of exposure before
tions remain as to proper administration scenario, and the analysis is further proceeding.
of the safe-harbor test. complicated for employers spanning Some ill-advised arguments when
multiple jurisdictions. pursuing the ERC under the suspension
Other considerations test include:
There are also additional matters to Be cautious about taking ■ The employer was following
consider in determining whether an aggressive positions nonmandatory guidance issued by
employer qualifies for the ERC. Where clear guidance is unavailable, the CDC and/or the Occupational
Comparable operations via ERC positions should be based on rea- Safety and Health Administration;
telework: Some employers found sonable interpretations of current law ■ The employer relied on the nar-
themselves subject to governmental and supplemental authority. The ERC rowly applicable suspended-supplier
orders closing their workplaces entirely. was intended to provide relief to em- exception on account of macro-level
At face value, this may seem like a ployers from the impact of COVID-19 supply chain bottlenecks (including
clear-cut case to establish eligibility, yet but was not intended to be universally supply shipments stuck at ports); and
this too requires additional analysis. In available. It seems clear the IRS will be ■ There were increases in costs in
these situations, the employer still must examining credits claimed with intense order to successfully maintain
establish that it was unable to continue scrutiny, as evidenced by Congress’s ex- pre-pandemic levels of operation.
comparable operations via telework. tending the statute of limitation for as-
Notice 2021-20 provides four factors to sessment of payroll tax returns on which Seek all available resources
consider when determining whether the the ERC is claimed to five years (Sec. The ERC rules are complex, and guid-
employer could continue comparable 3134(l)) and the issuance of Treasury ance, while limited, includes substantial
operations via telework: regulations directing erroneous ERC warnings for employers that aggressively
■ Employer’s teleworking capabilities; claims to be treated as underpayments interpret the rules or fail to conduct ap-
■ Portability of employees’ work; of payroll taxes and subject to assess- propriate due diligence before reporting
■ Need for presence in employee’s ment (T.D. 9904). Interest and penalties the credit. The AICPA has many re-
physical workspace; and can additionally be assessed on errone- sources to help members understand the
■ Difficulty or delays in transitioning ously claimed credits. rules (see Employee Retention Credit
to telework operations. Employers deciding on their ERC Guidance and Resources). The authors
Limitations on qualified wages: position should also consider the sig- recommend that you use all available
Two often-overlooked limitations apply nificant cumulative costs of a failure to resources when it comes to the ERC.
to the suspension test: sustain the ERC upon audit, including From Devin Tenney, J.D., Overland
■ Limitation to the period the order costs to calculate the credit, compliance Park, Kan., and Michael Wronsky, CPA,
was in effect: An employer may only costs related to amended filings for MST, Washington, D.C.

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