In a recent press release, the IRS seems to take the position that essential businesses are IN-ELIGIBLE for the ERC. This release has created much angst among business owners who claimed the ERC, and were deemed essential and were able to operate during the pandemic. Many such business owners have been under the impression that they were eligible for the ERC, and are concerned that they are now not eligible. As always, the reality is more nuanced, and understanding the multilayered criteria is essential for determining eligibility.

The Essential Business Dilemma

One of the key points the IRS emphasized in the release is that businesses that were fully operational and did not experience a decline in gross receipts are not eligible for the ERC. However, this warning seems to contradict previous IRS guidance, particularly the FAQs released in September 2023, which provided a more detailed examination of what constitutes partial suspension eligibility.

The September 2023 IRS FAQs underscore that essential businesses could still be eligible for the ERC if they meet specific criteria, namely:

1. Gross Receipts Test: If a business experienced a significant decline in gross receipts during the eligible period, it could qualify for the ERC regardless of its essential status. This criterion is relatively straightforward and applies universally across industries.

2. Partial Suspension of Operations: The more nuanced criterion involves the partial suspension of operations due to government mandates. Essential businesses could be eligible if they can demonstrate that a governmental order resulted in a partial suspension of their operations. This could include scenarios where certain activities, procedures, or services were limited due to the pandemic, despite the business being essential.

The test for partial suspension is not one-size-fits-all. It involves a complex analysis that takes into account the specific circumstances of the business, including its industry, geography, and the nature of the government mandates that were in place. For instance, a hospital may be considered an essential business, but during the pandemic, certain procedures or services may have been limited or suspended. If these limitations were more than nominal and had a significant impact on the hospital’s operations, the hospital could be eligible for the ERC based on partial suspension.

This multi-layered analysis is crucial because not all essential businesses were affected in the same way. The extent of the impact varied depending on the region and industry, with different rules applying to different businesses. Therefore, it’s vital for businesses to document the specific government mandates and the resulting modifications to their operations. This documentation can be key in demonstrating ERC eligibility based on a partial suspension of operations.

The recent IRS guidance highlights the importance of understanding the nuanced criteria for ERC eligibility, particularly for essential businesses. While being an essential business that remained fully operational and did not experience a decline in gross receipts may seem to disqualify a business from the ERC, the key is in the details. If a governmental authority’s orders affected the business’s ability to provide goods or services, even if only partially, the business may still be eligible for the credit.

Businesses should carefully evaluate their circumstances, gather the necessary documentation, and consult with a tax professional to ensure they are not overlooking potential eligibility for the ERC. The IRS’s recent press release serves as a reminder that the rules surrounding the ERC are complex, and understanding these complexities is essential for making informed decisions.

Disclaimer: We want to remind you that while we do have expert tax attorneys and tax professionals working on our team and for our clients, this blog is not legal or tax advice. But we do want to help. Reach out and schedule a time to speak with me or one of my teammates to review your unique set of facts and circumstances and see how we might be able to help you.

If you have any questions or think you may be eligible, click here to schedule your assessment.