Employee Retention Credit Articles

Does every small business in America qualify for employee retention credit benefits? Sitting on the sidelines, small businesses that received Paycheck Protection Program loans were shut out of the ERC program under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136). But in an extraordinary effort to support small businesses, Congress reversed course with signed legislation that retroactively allows small business PPP loan recipients to qualify for up to $5,000 per employee in payrolltax-monetized benefits for wages paid to employees back to March 13, 2020, and up to $14,000 prospectively for wages to be paid through June 30, 2021.1 Eighty percent of small businesses obtained PPP loans, of which 70 percent had fewer than 10 employees.2 Every small business should consider the opportunity to obtain an ERC looking back to 2020 and forward to 2021. A 50-person qualifying small business could earn nearly $1 million in credit cash benefits. With those potential material benefits, small business qualification could be a highstakes survival determination.

While the benefits are extraordinary, evaluating qualifications, computing the ERC, and filing for the credit benefits through the payroll reporting process can be quite complex.3 The statutory qualifications and credit calculation requirements for 2020 differ from those for 2021. Additional challenges are posed by ambiguity in how a business qualifies as a partially suspended eligible employer when none of the quantitative safe harbor tests for gross receipts are satisfied. Further, the amount of time that wages qualify for the ERC is an overlooked but high-risk area of the credit computation. If the quantitative gross receipts test is met, all wages for the quarter qualify for the ERC; however, if the business is partially suspended, the ERC is available only during the period of partial suspension, not the entire quarter. Experience has shown that this little-discussed nuance could result in future tax assessments against small businesses.

particularly useful in evaluating whether a small
business meets the subjective “partially
suspended” test for the ERC to qualify for
reimbursement of payroll on all employees.19
Further, in evaluating qualification and before
claiming benefits, taxpayers and practitioners
should be aware that the IRS has received
enforcement funding to support increased audits
and criminal investigations into violations of the
CARES Act provisions.20
Although there is not a lot of legislative
commentary, it seems clear that the authors of the
CARES Act and the CAA were concerned about
saving small businesses and jobs. For example, in
a December 21, 2020, release, then-Senate Finance
Committee ranking member Ron Wyden, D-Ore.,
said:
This economic crisis has been an
extinction level event for small businesses.
More than 100,000 small businesses have
already been lost, and without additional
support, many more will be permanently
shuttered. . . . My proposal to expand the
employee retention credit will ensure help
is accessible to those small businesses
struggling to survive. Importantly, it also
clarifies that small businesses that
received PPP funding may also use the
employee retention credit to cover other
wages. Ensuring businesses can access
relief from both programs is critical.21
According to a January 18 Tax Notes article, he
echoed that sentiment the same day in a colloquy
on the Senate floor with then-Finance Committee
Chair Chuck Grassley, R-Iowa:
Grassley asked if Wyden agreed that “our
intent is to allow struggling small
businesses to access the retention credit,

even if they have received a PPP loan?”
Wyden agreed and explained that
businesses that had PPP loans forgiven
could claim the credit for wages that were
not paid for with PPP loan proceeds and
that businesses that don’t have their loans
forgiven could claim the credit for any
wages (166 Cong. Rec. S7924). Grassley
added that the point was to prevent small
businesses from having to amend their
previously filed payroll tax returns and
alleviate some of the burden on taxpayers
and the IRS.22
In referring to the CAA, House Ways and
Means Committee Chair Richard E. Neal,
D-Mass., said, “This agreement isn’t perfect, but it
will offer struggling workers, families, and
businesses desperately needed support.”23 He
added, “Though we faced resistance, Democrats
fought for and successfully secured inclusion of
the expanded [ERC] and the deductibility of
expenses paid for using PPP loans, two provisions
that incentivize the hiring and retention of
workers.”24
And a legislative framework released by Ways
and Means Democrats on January 11 cites as a
policy priority ensuring that the ERC “helps
companies that the pandemic has harmed keep
workers on the payroll.”25
From the Democratic perspective, the ERC
would support hiring and the retention of jobs.
From the Republican perspective, the ERC would
help struggling small businesses survive. Leading
up to the enactment of the CAA, others touted the
economic support that an enhanced ERC would
provide to small businesses.
For example, tax economist Steven Hamilton
said it “would give a massive boost to small
businesses to almost cover their payroll.” He

added that an expanded ERC “favors medium- to
lower-income earners, and . . . would be a huge
support.”26 Hamilton said, “If you’re a business
with fewer than 10 employees, you’re going to get
a very large tax credit for each employee you have
on the books. . . . That gives you a really strong
incentive to keep those employees on the books
but also hire new ones.”27
With that commentary as a backdrop, we
outline the 2020 and 2021 ERC rules for small
businesses.
II. Small Business Qualification
A. Full-Time Equivalent Employee Test
Before the ERC benefits can be realized, a
small business must first determine whether,
annually, it has 100 or fewer full-time employees
for 2020 (500 or fewer for 2021), thus qualifying it
as a small employer for purposes of the ERC; and
then determine whether it is an eligible
employer.28 For many employers that have an
employee headcount near or above the full-time
employee limit, the mechanics of the calculation
may mean the difference between qualifying all
employees for the ERC or qualifying only a small
number.
Businesses with more than 100 full-time
employees for 2020 (or more than 500 for 2021)
must perform an additional step: identifying
which employees were compensated for not
performing services. That is because only the
wages paid to employees for not providing
services qualify for the ERC for large businesses.
Small businesses, however, are not subject to this
additional limitation and can claim the ERC on all
employee wages during each eligible quarter (or
eligible period if the business was suspended for
only a portion of the quarter).29 This is an
important benefit to small businesses — the
wages of all employees in the business, even if
they are fully deployed with no impairment, will
qualify for the ERC. In effect, Uncle Sam picks up

the tab for half of the 2020 wages and 70 percent of
the 2021 wages paid to those employees.30
Again, however, all those salary
reimbursement benefits depend on not exceeding
the small business employee headcount and
qualifying as an eligible employer. Companies
near the 100-employee or 500-employee mark for
2020 and 2021, respectively, will want the
computation of employees under this test to be as
small as possible. As noted, the JCT report
includes part-time employees in the full-time
employee calculation.31 However, the IRS’s FAQ
49 provides a more favorable method of
computing total full-time employees: by
including the employees based only on hours
worked. Using the FAQ-prescribed method, a
small business will perform the calculations
described below.
B. 2020 Lookback Small Business Test
To determine small business status for
purposes of the 2020 ERC, an employer should
take the following steps:
1. Identify employees who worked 130 hours
or more per month for each month of 2019.
Only employees who averaged at least 30
hours of work per week should be
included.
2. Total the number of employees from step 1
for all of 2019 and divide the result by 12.
3. If the average number of employees is 100
or less, the employer qualifies as a small
business.32
C. 2021 Prospective Small Business Test
The CAA massively expanded the scope of
companies qualifying for the small business
benefits by increasing the employee limit from
100 to 500, consistent with the definition of small
business for PPP purposes.33
Although the expanded definition of small
business applies only to 2021 (not to 2020), the

measuring period of employees remains calendar
year 2019 (not 2020). Unfortunately, 2019 is a less
favorable testing period because many small
businesses would have had more employees in
2019 than in 2020. Other than the number of
employees qualifying an employer as a small
business, the other elements of the computation
described above are the same. Small businesses
meeting the headcount test will then move on to
the eligible employer tests and finally to the
computation of qualifying wages.
D. 2020 Eligible Employer Tests
The eligible employer hurdle is the most
important in qualifying for the ERC. There is a
clear-cut quantitative path and an alternative, less
clear qualitative path. An eligible employer is one
that was carrying on a trade or business in 2020
and had either (1) a significant (at least 50 percent)
reduction in gross receipts in the past year or (2) a
full or partial suspension of business operations
caused by government orders.34
Many small businesses have thrived
economically during the COVID-19 crisis, leading
them to conclude that they can’t qualify for the
ERC. That is not the case. Every small business,
even if economically prospering, could qualify. In
informal discussions with Treasury legal staff, we
confirmed that economic hardship isn’t necessary.
The alternative eligible employer tests are
animated by different concerns. The gross receipts
test offers benefits to retain employees in
economically distressed businesses (for example,
restaurants or hospitality businesses), whereas
the full or partial suspension test provides an
incentive for small businesses to retain employees
whose work has been fully or partially suspended
because of pandemic-related government orders.
Under the latter test, there is no need for the
business to have suffered losses or even a decline
in revenue. This reflects the purpose of the ERC,
which is to retain and compensate employees
who might have otherwise been terminated,
furloughed, or suffered pay cuts as the result of a
reduced workload.
Many small businesses chose to retain
employees with no adjustment to compensation

— particularly exempt and nonexempt full-time
salaried employees — even when parts of the
business were affected by state or local
government orders. So every small business
should evaluate its qualification under both tests,
starting with the quantitative gross receipts test
and then the qualitative suspension test.
E. 2020 Quantitative Eligible Employer Test
To qualify as an eligible employer under the
quantitative test:
1. compare gross receipts for each quarter in
2020 with gross receipts for the same
quarter in 2019;
2. if gross receipts for a 2020 quarter are less
than 50 percent for the same quarter of
2019, the small business is an eligible
employer; and
3. all subsequent quarters will automatically
qualify until the end of the first quarter in
which gross receipts are 80 percent or
more of the same quarter in 2019.
If this mechanical test is met, the qualifying
wage amount eligible for the ERC must be
computed by quarter after considering the PPP
and other credits programs discussed later.
F. Common Control Aggregation
1. Qualification as a small business, gross
receipts tests.
Related business entities, whether in
corporate, partnership, or sole proprietorship
form, must apply the ERC rules across all entities
under common control (defined as greater than 50
percent common ownership) as if they were a
single business.35 This can create winners or
losers, depending on facts. For example, all
related small businesses would qualify for the
ERC for all employees for the qualifying 2020 and
2021 periods if any member of the commonly
controlled group qualified.36 On the other hand,
all the commonly controlled businesses must be
aggregated in calculating key qualification
criteria, including:

• whether an employer has a significant
decline in gross receipts; and
• whether an employer’s full-time employee
count satisfies the applicable small business
threshold for 2020 (an average of 100 or
fewer full-time equivalents) or 2021 (an
average of 500 or fewer full-time
equivalents).37
The CAA does not comment on the
aggregation rules. The only guidance is the
previously issued IRS FAQs, meaning there is no
change in the aggregation analysis for 2020 and
2021.
2. Related-entity PPP loan.
Under the CARES Act, if any related business
under common control obtained a PPP loan, all
the related entities were barred from taking an
ERC. Fortunately, the CAA removed this
limitation by allowing businesses to both receive
PPP loans and qualify for the ERC. This change is
retroactive, potentially creating a windfall for any
small business that was unable to claim the ERC
because of a relationship with a related entity that
obtained a PPP loan. As outlined later, any small
business in these circumstances should consider
looking back to claim the 2020 ERC.38
G. Full/Partial Suspension of Business Operations
For small businesses not meeting the gross
receipts test, there is still an opportunity to qualify
as an eligible employer for the ERC if it can be
established that the business was fully or partially
suspended because of a pandemic-related state or
local government order. This is an extraordinarily
important analysis for small businesses. If it can
be shown that a small business was an eligible
employer for all or a portion of the quarter, the
wages of its entire workforce will qualify for ERC
benefits for the qualifying period. In plain
English, Treasury will fund half of the entire small
business’s payroll looking back to 2020 and 70
percent looking forward (subject to caps, as
noted).
Given the enormity of the potential economic
benefit under the governmental order test, it is

critical to carefully review the language in the
statute, along with every bit of guidance issued by
Treasury (through FAQs and otherwise) and
Congress (through committee reports), and apply
that guidance to each small business’s facts to
determine the eligible period.
H. The Statute
CARES Act section 2301(c)(2)(A) defines an
eligible employer for purposes of the ERC for
employers subject to closure because of
COVID-19:
The term “eligible employer” means any
employer — (i) which was carrying on a
trade or business during calendar year
2020, and (ii) with respect to any calendar
quarter, for which — (I) the operation of
the trade or business described in clause
(i) is fully or partially suspended during
the calendar quarter due to orders from an
appropriate governmental authority
limiting commerce, travel, or group
meetings (for commercial, social,
religious, or other purposes) due to the
coronavirus disease 2019 (COVID-19).
The key to interpreting the law is
understanding what is meant by “orders from an
appropriate governmental authority.”
I. Government Orders
A small business should begin by identifying
the state and local government orders that apply
to its operations based on its location. Businesses
with multiple locations should review each
location for applicable government orders that
may have applied to its operations. As discussed
later, voluntarily applying government orders to
multiple locations may qualify all locations for the
ERC.39
The CARES Act does not use the term
“closure” to define an eligible employer.40 Instead,
it uses a lower, more permissive bar: The business
must demonstrate that it was fully or partially
suspended as the result of government orders that
limited:

• commerce;
• travel; or
• group meetings.
COVID-19 government orders have been
pervasive and broadly defined. It is hard to
imagine any town in America that has not
endured limits on commerce (for example, office
closures or limited hours of operation), travel (for
example, flight restrictions or quarantines), or
group meetings (for example, conferences and the
size of groups allowed in offices, stores, or even
homes).
The CARES Act broadly defines qualifying
government orders as those that limit commerce,
travel, or group meetings for:
• commercial;
• social;
• religious; or
• other purposes.
The clear and unambiguous language of the
statute means that any business that is even
partially suspended because of a pandemicrelated government order that limits commerce,
travel, or group meetings for commercial, social,
religious, or other purposes is an eligible
employer for ERC purposes.
Thus, every small business should identify
each quarter in 2020 when government orders
affected its business. If the government orders
partially suspended the business’s operations, it is
an eligible employer entitled to the ERC for every
employee for the period during which the order
affected the business. Multiple orders over the
course of the year can qualify the company for the
quarter, if not multiple quarters. FAQ 28 provides
guidance on what government orders may be
taken into account for purposes of the ERC:
Orders, proclamations, or decrees from
the Federal government, or any State or
local government are considered “orders
from an appropriate governmental
authority” if they limit commerce, travel,
or group meetings due to COVID-19 in a
manner that affects an employer’s
operation of its trade or business,
including orders that limit hours of
operation and, if they are from a State or
local government, they are from a State or
local government that has jurisdiction

over the employer’s operations (referred
to as a “governmental order”).
Statements from a governmental official,
including comments made during press
conferences or in interviews with the
media, do not rise to the level of a
governmental order for purposes of the
Employee Retention Credit. Additionally,
the declaration of a state of emergency by
a governmental authority is not sufficient
to rise to the level of a governmental order
if it does not limit commerce, travel, or
group meetings in any manner. Further,
such a declaration that limits commerce,
travel, or group meetings, but does so in a
manner that does not affect the employer’s
operation of its trade or business does not
rise to the level of a governmental order.
A governmental order allows employers
to qualify as Eligible Employers for
purposes of claiming the Employee
Retention Credit without regard to the
level of enforcement of the governmental
order.
Governmental orders include:
• An order from the city’s mayor stating that
all non-essential businesses must close for
a specified period;
• A State’s emergency proclamation that
residents must shelter in place for a
specified period, other than residents who
are employed by an essential business and
who may travel to and work at the
workplace location;
• An order from a local official imposing a
curfew on residents that impacts the
operating hours of a trade or business for
a specified period;
• An order from a local health department
mandating a workplace closure for
cleaning and disinfecting.
Example 1: Governor of State Y issues an
order that all non-essential businesses
must close from March 20, 2020 until April
30, 2020. The order provides a list of nonessential businesses, including gyms,
spas, nightclubs, barber shops, hair salons,
tattoo parlors, physical therapy offices,

waxing salons, fitness centers, bowling
alleys, arcades, racetracks, indoor
children’s play areas, theaters,
chiropractors, planetariums, museums,
and performing arts centers. Employers
that provide essential services may remain
open. The governor’s order is a
governmental order limiting the
operations of non-essential businesses,
entitling employers with non-essential
businesses to claim the Employee
Retention Credit for qualified wages.
Example 2: Mayor of City Y holds a press
conference in which she encourages
residents to practice social distancing to
prevent the spread of COVID-19. The
statement during the press conference is
not an order limiting commerce, travel, or
group meetings. Accordingly, the mayor’s
statement would not be a governmental
order for purposes of the Employee
Retention Credit.
Example 3: A restaurant is ordered by a
local health department to close due to a
health code violation. Since the order is
unrelated to COVID-19, it would not be
considered a governmental order for
purposes of the Employee Retention
Credit.
From these examples, any small business that
can establish any of the following will be an
eligible employer entitled to the ERC for all
employees for each applicable quarter (or portion
of that quarter) when in effect:
• the business has limited hours of operation;
• the business is temporarily shut down;
• employees must shelter in place and are
restricted from going to work;
• employees are subject to a curfew that
affects work hours; or
• the employer must shut down for cleaning
and disinfecting.
Beyond the examples presented in the
government orders, the IRS provided additional
guidance in FAQs 30 through 38.

J. FAQ Guidance on Eligible Employer
1. Supply chain disruption — essential
business.
Under FAQ 32, an essential business will be
treated as a partially suspended eligible employer
if it can be demonstrated that its suppliers are
unable to deliver needed supplies because of
government orders that caused the suppliers to be
suspended.41 Thus, another path for a small
business to demonstrate that it was partially
suspended is to look at its supply chain
relationships to identify downstream government
orders affecting its vendors.
2. Essential business limitation on working
hours.
Another path to eligible employer
qualification is to demonstrate that the business
was required to close during working hours.42
3. Unable to operate in a comparable manner
because of COVID-19 orders.
Another qualifying path is to illustrate that
access to the company’s physical facilities is
central to operations and that the business cannot
continue to operate in a comparable manner. Even
if the business shifts to an online format to serve
customers, the business would still qualify as
partially suspended. Example 2 of FAQ 33
provides:
Employer D operates a physical therapy
facility in a city where the mayor has
ordered that only essential businesses
may operate. Employer D’s business is not
considered essential under the mayor’s
order, which requires Employer D to close
its workplace. Prior to the governmental
order, none of Employer D’s employees
provided services through telework and
all appointments, administration, and
other duties were carried out at Employer
D’s workplace. Following the
governmental order, Employer D moves

to an online format and is able to serve
some clients remotely, but employees
cannot access specific equipment or tools
that they typically use in therapy and not
all clients can be served remotely.
Employer D’s business operations are
considered to be partially suspended by
the governmental order because Employer
D’s workplace, including access to
physical therapy equipment, is central to
its operations, and the business operations
cannot continue in a comparable manner.
4. Unbundle a portion of the business that
cannot be conducted in a comparable manner
because of government orders.
Another path to eligible employer
qualification is to unbundle elements of the
business that cannot be conducted in a
comparable manner because of government
orders. In Example 3 of FAQ 33, quoted below,
most employees pivot to perform their work
remotely, but there are some employees who are
unable to do on-site lab work, causing a partial
suspension of the business. This is an important
illustration of a small business unbundling
employees within the company who are unable to
perform their work in a comparable manner
because of government orders:
Employer E, a scientific research company
with facilities in a state in which the
governor has ordered that only essential
businesses may operate, conducts
research in a laboratory setting and
through the use of computer modeling.
Employer E’s business is not essential
under the governor’s order, which
requires Employer E to close its
workplace. Prior to the governmental
order, Employer E’s laboratory-based
research operations could not be
conducted remotely (other than certain
related administrative tasks) and
employees involved in laboratory-based
research worked on-site; however,
Employer E’s computer modeling research
operations could be conducted remotely
and employees engaged in this portion of
the business often teleworked. Following
the governmental order, all employees

engaged in computer modeling research
are directed to telework, and those
business operations are able to continue in
a comparable manner. In contrast, the
employees engaged in the laboratorybased research cannot perform their work
while the facility is closed and are limited
to performing administrative tasks during
the closure. Employer E’s business
operations are considered to be partially
suspended by the governmental order
because Employer E’s laboratory-based
research business operations cannot
continue in a comparable manner.
5. Limitations on access to the physical
workplace.
If an employer’s workplace is closed by a
government order for specific purposes but it may
remain open for other purposes, or the employer
is able to continue some operations remotely, the
employer’s operations would be considered
partially suspended. Modification of the
workplace would not qualify as a partial
suspension unless the government order has
more than a nominal effect on the business
operations under the facts and circumstances. For
example:
• a retail store that closed but conducts ecommerce business online is partially
suspended;43 and
• a hospital that is considered to be operating
in an essential industry but is precluded
from providing nonessential medical
services is partially suspended.44
6. Reduced working hours caused by
pandemic-related operating limitations.
An important way to potentially qualify as an
eligible employer based on a partial suspension of
the business is to identify any government orders
that restrict the operations of the business by
limiting its operating hours. The business may be
functioning but have new government-ordered
requirements that place restrictions on its
operations. This is illustrated in FAQ 35 with the
example of a food processing business that is

required to do a deep clean of the workplace
every 24 hours, costing the business five hours of
operations every day for the entire period the
government order is in place.45
7. Limitations that create more than a nominal
effect on the business.
The FAQs introduce a pragmatic, nuanced
approach to evaluating whether government
orders have sufficient effect on a business to cause
its operations to be considered partially
suspended: A small business seeking
qualification as an eligible employer based on a
partial suspension must identify government
orders that have had more than a nominal effect
on its operations.
The nominal qualification framework is first
introduced in FAQ 30, which involves an essential
business. The FAQ indicates that an essential
business may be considered partially suspended
if more than a nominal part of its operations are
suspended by a government order, even if the
order affects only the nonessential part of the
business.46
FAQ 34 provides several examples:
• A restaurant is allowed to have outdoor
dining, takeout, and indoor dining, but
customers must be spaced at least six feet
apart. Even though the restaurant can fully
serve its customers, the spacing requirement
creates more than a nominal effect on the
restaurant’s operations, thus qualifying the
business as an eligible employer.47
• A grocery store had to close its salad bar but
replaced it with prepackaged salads. The
business was not partially suspended,
because the government order did not have

more than a nominal effect on the store’s
operations.48
• Under a government order, a retailer can
have no more than a specified number of
customers in its store at any given time.
Although this results in customers waiting
in a line for a short period, the government
order is not considered to have more than a
nominal effect on the business. Customers
could still shop in the store, which, after a
short wait, was large enough to
accommodate all of them.49 Note, however,
this conclusion is based on specific facts and
circumstances. It could easily change if the
business could demonstrate that the
government order had more than a nominal
economic effect on its operations (for
example, long lines causing a loss of
customers, or appointments being required
to visit a store, doctor, bank, etc.).
Thus, it appears that a business is partially
suspended if a government order’s effects on
commerce, group meetings, or travel have more
than a nominal impact on the business’s
operations. The FAQs do not define what
constitutes a nominal portion of a business,
beyond the examples outlined above.
The Oxford Dictionary of English (2010) defines
nominal as “being something in name only, and
not in reality” and (referring to a sum of money)
“very small and much less than the normal cost or
charge.” That definition suggests that the closure
of a small portion of a business might create a
partial suspension. The code uses the term
“nominal” in other contexts when quantifiable
measures are not given. However, the examples
all involve situations in which fees are a fraction
of the true costs of the services or goods provided:
• A church can qualify as a section 501(c)(3)
exempt entity, even if it makes sales to the
public, if the sales are nominal or for
“substantially less than the cost of providing
such goods, services or facilities.”50 For
instance, the IRS ruled that a public

swimming pool that raised funds through
public contributions qualified as a section
501(c)(3) organization, even though it
charged “nominal” amounts to enter.51
• The code defines a qualified low-income
taxpayer clinic as a clinic that does not
charge more than a nominal fee for its
services (except for reimbursement of actual
costs incurred).52
• Courts may award attorney fees for more
than the fees incurred in pro bono situations
or if the attorney is charging a “nominal
fee.”53
Although there is no guidance on the value of
the nominal charges and fees in the above
situations, each would likely be small compared
with the full value. Other code sections and IRS
guidance in other areas of tax law use numerical
comparisons to disregard specified transactions
or activities if nominal:
• Individuals have a “nominal presence” for
long-term permanent residency purposes if
they are in the United States less than 10
days in a year and have a closer connection
to another country.54 Consequently, less than
10 days in a year (or 2.7 percent) would
constitute a nominal period for residency
purposes.
• For personal income tax purposes, the IRS
does not include nominal or de minimis
prizes and awards in gross income. The
taxable fringe benefit guide explains that
nominal amounts are small in value relative
to the value of total compensation. It gives
the example of a $100 gift card.55
• Similarly, employers may deduct up to $400
of achievement awards paid under
nonqualified plans to an employee each
year, but nominal awards are not included
in the calculation.56 It is implied that nominal
awards would be a small percentage of the

$400 cap, but a specific percentage is not
defined.
The IRS provides a numerical interpretation
of nominal in all three of those examples. First,
more than 10 days out of 365 annual days would
be nominal, or 2.7 percent of the year. Second, a
nominal $100 gift card would be excludable under
fringe benefit rules. Assuming a modest annual
salary of $25,000, the $100 would be 0.4 percent of
the salary. Third, a nominal achievement award is
a small percentage of a $400 award. Nominal is
likely well below 10 percent of a business’s
operations using other examples under the code.
Identifying government orders affecting the
small business and quantifying the financial
impact could be an effective way to objectively
demonstrate that a small business is partially
suspended because of government orders that
created more than a nominal effect on its
operations.
8. Revenue loss from customer travel
restrictions does not qualify as a partial
suspension of business.
An essential business that is not required to
close its physical locations or otherwise suspend
its operations is not considered to have a full or
partial suspension of its operations merely
because its customers are subject to government
orders requiring them to stay at home.57 This is
presumably because the orders are not directly
affecting the business itself. However, the
business still might be able to demonstrate a
partial suspension of its operations based on other
factors, such as reduced operating hours,58
mandated COVID-19 cleaning procedures,59
employee access to the worksite,60 or supply chain
disruptions.61
K. JCT Guidance on Eligible Employer
The JCT report on the CARES Act describes
the eligible employer test as the “governmental

order test” and provides several examples of
qualifying facts.
1. Limitations on use of physical space.
A restaurant in a state under a statewide order
that restaurants offer only takeout service meets
the governmental order test.62
2. Limitation on size of gatherings.
A concert venue in a state under a statewide
order limiting gatherings to no more than 10
people meets the governmental order test.63
3. Limitation on physical space with
employees who cannot perform services from
home.
Similarly, an accounting firm that is subject to
a directive from public health authorities to cease
all activities other than minimum basic operations
and that closes its offices and does not require
employees who cannot work from home (for
example, custodial and mailroom employees) to
work meets the governmental order test and is
partially suspended.64
This is an important example because the allor-nothing small business test would qualify this
accounting firm for the ERC on all employees, not
just the custodial and mailroom employees. One
can imagine that retaining the employees who
cannot perform work remotely would cost less
than the ERC generated from qualifying the entire
workforce.
4. Limitations on commercial activity,
gathering size, and travel do not qualify if the
business is exempt from the orders because it
is an essential business.
A grocery store in a state that generally
imposes limits on food service, gathering size,
and travel outside the home but exempts grocery
stores (and travel to and from grocery stores) from
any COVID-19-related restrictions (for example,
because they are deemed essential businesses)
would not meet the governmental order test.65

L. Businesses With Multiple Locations
FAQ 36 provides a favorable rule for multilocation businesses: A business can attain
nationwide eligibility if it is affected by a local
government order at only one of its locations. For
small businesses with multiple locations, this may
help demonstrate a partial suspension of
operations.66
Although not entirely clear, FAQ 36 also
seems to sanction qualification of a business as
partially suspended based on voluntary
compliance with federal orders under the Centers
for Disease Control and Prevention (CDC) and the
Department of Homeland Security (DHS).67 In
analyzing whether a business has been partially
suspended, evaluating CDC and DHS orders may
be desirable.
M. Evaluating Small Business Partial Suspension
Under the statutory framework, the partialsuspension analysis should be based on
government orders directly affecting the small
business. It’s not enough to identify a loss of
customer business because of reduced customer
demand or government orders negatively
affecting the small business’s customers.
Identifying negative pandemic-related events in
the business may be helpful, but the effect of the
government orders must be viewed through the
prism of the partial suspension of business
operations test:
• What can’t the business do because of the
orders?

What can’t the employees do because of the
orders?
• How is the business’s relationship with
customers harmed by the orders?
• How does the effect of the orders translate
into employees not providing services or
products?
A demonstrated direct effect on the business
or its employees should be documented. An
alternative is to demonstrate that government
orders had a direct effect on the small business’s
suppliers and that the indirect effect on the
business (the lack of necessary inputs, such as
parts, materials, or services) caused a partial
suspension of operations.
To demonstrate a partial suspension, the
business should show that an order affected its
ability to serve customers in a comparable manner
or affected its employees’ ability to do their jobs in
a comparable way. Treasury’s view is that remote
employees performing the same work from home
as in the office are not partially suspended by an
office or facility closure. In contrast, if employees
are unable to do the same work remotely but are
still retained, the entire business would qualify as
a partially suspended business (recall from the
JCT report the accounting firm with custodial and
mailroom employees who couldn’t do
comparable work outside the office).68 Again,
because the small business ERC is potentially all
or nothing, it may be more profitable to retain
displaced workers and thus earn an ERC on all
employee payroll.
A common scenario is that the sales force for a
small business has been unable to visit prospects
and customers. To analyze these facts for partial
suspension, begin by evaluating whether
government orders prevented the sales personnel
from traveling (for example, an airlines service
shutdown, or sales personnel subject to stay-athome or quarantine orders) or whether the
customers were simply unwilling to meet. If
customers were simply unwilling to meet with
sales personnel, making it impractical for them to
travel, would that constitute a partial suspension
caused by a government order?

What if the customers could not meet because
their offices were closed by local government
orders? On the surface, the government order is
on the customer, not the small business. But the
government order also applies to the salesperson
who was prevented from meeting with a
customer. In that instance, it would appear that
the government order also applies to the small
business whose sales personnel can’t meet with
customers, causing a partial suspension of the
business as the result of government orders
affecting travel and commerce.
The IRS could argue that the employees could
have performed comparable work by phone or
video conference. In that instance, the small
business might respond with data or metrics
demonstrating that it suffered a more-thannominal financial impact because of the lack of inperson customer meetings. Instead of a violinsolo analysis of the sales force, the business
should present the entire orchestra — all the
business impacts — to provide a compelling
symphony of how government orders affected its
operations.
After determining whether the small business
qualifies under the gross receipts quantitative test
or the partial suspension qualitative tests, the next
step is to identity the amount of quarterly
qualifying wages to claim for the ERC.
III. Qualifying Wages and the PPP
A. Qualifying Wages
Small employers that (1) averaged 100 or
fewer full-time employees in 2019 for the 2020
ERC period, and 500 or fewer employees in 2020
for the 2021 ERC period; and (2) met either the
eligible employer gross receipts test or the full or
partial business suspension test will include
wages paid to any employee during any period in
the calendar quarter in which the business
operations meet either test.69
For small employers that qualify under a
partial business suspension, it is crucial they

understand that the eligible wages paid are
limited to the period the business is suspended.70
A partial suspension during a quarter does not
automatically apply to an entire quarter’s wages
as when the gross receipts test is met.71 A single
suspension of business may last multiple
quarters, or several consecutive suspensions
under different government orders may combine
to suspend the business for an entire quarter.
Given the risk of repayment, businesses need to
make sure the eligible periods associated with a
government order apply to the entirety of the
quarter for which they are seeking benefits or
adjust their calculations for the limited period
during which operations were affected.
The CAA codifies the IRS’s FAQ-described
interpretation that health plan expenses excluded
from income under section 106(a) may be treated
as qualified wages even if no wages are paid for
the eligible period.72 It’s common for companies to
have furloughed employees who would not have
received wages but whose healthcare costs are
still covered. Small businesses should evaluate
healthcare costs to identify the optimal method to
allocate costs quarterly, including:
• the applicable premium for the employee
typically available from the insurer;
• one average premium rate for all employees;
or
• a similar method that considers the average
premium rate, determined separately for
employees.
A small business cannot simply apply the
ERC to total payroll. Each biweekly or
semimonthly payroll period must be reviewed to
calculate qualifying wages per employee and to
limit the ERC calculation to the appropriate cap
on wages (limited to $10,000 in 2020, and to
$10,000 per quarter in 2021 after taking into

account the use of payroll for PPP loans and other
credits).
Although large employers in 2021 can include
additional payments such as bonuses, severance,
and similar payments into their wage
calculations, small employers were never
hindered by this rule.73 All wages paid during an
eligible period qualify for the ERC, including
those paid under a vacation, sick, or other leave
policy. The only ineligible wages paid out are
those that qualify for other credits or are paid out
of PPP funds.74
It’s common for small businesses to employ
the owners (shareholders or partners) and family
members. Business owners can claim ERC on
their own wages, but the credit is not allowed on
wages paid to some close family members (for
example, children, siblings, parents, nieces,
nephews, and in-laws).75
B. PPP Forgiveness and Other Credits
Under the CAA, a small business cannot
include the forgiven PPP loan used for wages in
the calculation of the ERC.76 At a high level for
most businesses, the PPP wages would have been
incurred earlier in the year (in the second and
third quarters of 2020), leaving the fourth-quarter
2020 wages available for the ERC. If the wages not
paid out of PPP funds exceed $10,000 per
employee, the small business can proceed with
computing the ERC. If the ERC falls short of the
maximum $5,000 credit per employee, a more indepth analysis should be performed. Thus, the
small business should review the costs included
in the PPP loan forgiveness to identify the amount
of wages paid with the PPP loan.77 When possible,
the small business should use as many nonpayroll costs for the PPP forgiveness as possible to
maximize wages available for the ERC. Changes
to the PPP rules make it possible to use more PPP
funds for non-payroll expenses.

The Paycheck Protection Program Flexibility
Act of 2020 (P.L. 116-142) made substantial
changes to the PPP, including decreasing the
percentage of loan proceeds dedicated to payroll,
from 75 percent to 60 percent.78 Thus, a small
business can use additional categories of nonpayroll costs (for example, rent, mortgage
interest, and utilities) to support its loan
forgiveness. Minimizing payroll used for the PPP
will allow the small business to preserve the
payroll for the ERC and other wage-driven tax
benefits. In many cases, it may be possible to not
only obtain the PPP loan and ERC, but also stack
other credit benefits onto the remaining wages
(for example, research credits). Under the CARES
Act, double dipping benefits was not allowed for
a short list of other credit programs, including:
• wages used for paid sick and family leave
under the Families First Coronavirus
Response Act (P.L. 116-127);
• wages used for the Family and Medical
Leave Act credit under section 45S;
• wages paid to related individuals specified
in section 51(i)(1); and
• wages used for the section 51 work
opportunity tax credit calculation.
Note that research credit double dipping was
not explicitly precluded under the CARES Act,
but the CAA corrected that oversight for 2021 and
limited the use of payroll for other credits,
including those under:
• section 41 (research credit);
• section 45A (Indian employment credit);
• section 45P (employer wage credit for
employees who are active-duty members of
the uniformed services); and
• section 1396 (Empowerment Zone
employment credit).
These limitations apply only to wages used for
the ERC, not all wages paid to an employee for the
period that may potentially qualify for an
additional credit.

IV. 2021 ERC Qualification and Benefits
The prospective 2021 small business benefits
are significantly enhanced, with the government
potentially picking up 70 percent of the payroll
costs for all employees for the first half of the year.
Much-larger companies will qualify for the
beneficial small business rules under the
expanded definition of small business (increased
from 100 employees to 500 employees (or less))
and bolstered credits based on 70 percent (instead
of 50 percent) of wages, up to $14,000 of credits
per employee for 2021.79 The credits will be
computed on $10,000 of wages per quarter (for
two quarters total for January through June)
instead of on only $10,000 for the entire year
(consisting of March 13 through December 31,
2020).
Small employers will evaluate qualification as
an eligible employer quarterly in 2021 under gross
receipts tests more liberal than the 50 percent test
for 2020. Small businesses that don’t meet the new
gross receipts test will continue to apply the
eligible employer and full or partial suspension
tests quarterly as described earlier. Given the
high-stakes value of all employees qualifying for
the ERC under the partial suspension test, it will
be imperative for small businesses to carefully
identify any government orders quarterly and
evaluate whether the effect of the orders created a
partial business suspension in 2021.
For all but the most severely distressed
businesses, it was difficult to meet the 50 percent
decline in business test in 2020. Fortunately, for
2021 a business needs only a 20 percent gross
receipts reduction to qualify as an eligible
employer, avoiding the potential uncertainty
under the subjective partial business suspension
test. There are more options available to meet the
quantitative loss of revenue tests in 2021,
including a comparison of revenue in 2021 and
2019, or instead comparing revenue from the most
recent quarter (the fourth quarter of 2020 with the
fourth quarter of 2019). Thus, the following
analysis should be completed to determine
whether the business qualifies under the
numerical safe harbor test:

Compare gross receipts in a 2021 quarter
with gross receipts in the same quarter in
2019.80
• If the receipts in the applicable 2021
quarter drop by 20 percent or more
compared with the same quarter in 2019,
the business is an eligible employer.
2. If the business did not exist at the
beginning of the same quarter in 2019, use
the same quarter in 2020.
3. If the quantitative tests are not met using
the same-quarter comparison with 2019,
compare the gross receipts under an
alternative gross receipts test81:
• identify the gross receipts for the
immediately preceding calendar quarter
(the fourth quarter of 2020);
• identify the gross receipts for the
corresponding fourth quarter in 2019; and
• if the receipts in the fourth quarter of 2020
dropped by 20 percent or more compared
with the same quarter in 2019, the business
is an eligible employer for the first quarter
in 2021.
As described earlier for the lookback 2020
ERC, if the quantitative test is met, the small
business will be an eligible employer. However,
the qualifying wage amount must be computed
by quarter or for the time the government order
was in effect, after considering the PPP and other
credit programs.
V. ERC Through the Payroll Filing Process
A. The 2021 ERC
The options to claim the 2021 ERC include:
• claiming the ERC on the current-period
Form 941, “Employer’s Quarterly Federal
Tax Return”;
• claiming the ERC for a previous period on
Form 941-X; and

filing Form 7200, “Advance Payment of
Employer Credits Due to COVID-19,” for
the ERC advance payment.
Under the CARES Act, an eligible employer
could claim an advance ERC by reducing its
required quarterly payroll tax deposits
commensurate with the anticipated future ERC or
by filing Form 7200 to obtain an advanced ERC,
and then reporting any reduced deposits and
advanced credits, along with the total credit, on its
future Form 941 for the applicable quarter.82
The IRS provided penalty relief for failure to
deposit taxes because of incorrect estimates of the
ERC under Notice 2020-22, 2020-17 IRB 664.83 The
notice relieves employers from the section 6656
failure-to-deposit penalty if the undeposited
amounts are less than the anticipated ERC.
The CAA eliminates advance payments of the
credit, except for small businesses (500 or fewer
full-time employees for 2019).84 As of this writing,
the IRS has not issued payroll tax guidance
regarding small business advance payments for
the ERC. Given the importance of preserving cash
for many small businesses, the most expeditious
way to realize the ERC may be to withhold payroll
tax deposits in the amount of the anticipated ERC.
If the anticipated payroll tax deposits are not
adequate to absorb the entire ERC, Forms 7200
could be filed for the anticipated ERC for January
1 to June 30, 2021.
Obtaining advance payment for 70 percent of
anticipated wages to all employees for the first six
months of the year could be a material financial
boost to small businesses. Assuming full-time
employees earn at least $20,000 over the eligible
six-month period ($10,000 per quarter), a 10-
person company could receive an advance
$140,000 government payment. If the amount of
the actual credit determined at the end of the
quarter is less than the amount of the advance
payment, the small business must repay the
excess to the government.85 Accordingly, caution
should be exercised to not overestimate the
benefit and to reserve funds for potential

repayment.86 The IRS has outlined procedures for
businesses using a professional employer
organization to obtain the same benefits as a
business filing its payroll taxes directly.87
B. Catch-Up 2020 Credit
Several alternatives are available to small
businesses to obtain the retroactive 2020 ERC
benefits, including:
• filing a Form 941-X for eligible 2020
quarters; and
• claiming the catch-up credit in a single
quarter.
The CAA serves as a time machine to make
the relevant changes in the ERC provisions
retroactive, as though they were part of the
original CARES Act passed in March 2020.88
However, because the payroll tax returns have
already been filed, the most obvious method to
obtain the ERC benefits is to file Forms 941-X for
the second and third quarters of 2020 to claim
refunds.
The IRS has signaled that it wishes to
minimize amended returns associated with
changes in the law, and the CAA provides a more
expeditious method for small businesses to
realize the ERC benefits. They can elect to avoid
filing Forms 941-X by instead reporting a catch-up
credit in the quarter in which the act became law.89
Because the CAA was signed in December 2020, it
appears that the catch-up credit could be claimed
on the fourth-quarter Form 941 without filing any
amended returns. Based on the wording of the
statute, it appears that unless the credit was filed
with the fourth-quarter Form 941 (which was due
January 31, 2021), an amended Form 941-X will be

required for the entire 2020 credit on the fourthquarter payroll tax return.90 In the interest of
minimizing amended returns, it would be
surprising if the IRS didn’t issue guidance
allowing the catch-up credit to be claimed on
future quarterly Forms 941 in 2021.91
VI. Conclusion
Does every small business in America qualify
for ERC benefits?
Every small business in America whose gross
receipts (cash basis or accrual) for either the first
or second quarter of 2021 will decline by 20
percent compared with the same quarter in 2019
will qualify for the ERC (as will small businesses
meeting alternative numerical receipts tests).
Every small business in America whose gross
receipts for any of the eligible quarters of 2020
declined by more than 50 percent compared with
the same quarter in 2019 will qualify for the ERC.
That leaves all the small businesses that did
not suffer a 50 percent revenue decline in 2020 or
will not suffer a 20 percent revenue decline in
2021. Those prospering small businesses will
qualify if subject to pandemic-related government
orders that caused a partial shutdown of
operations because they:
• limited hours of operations;
• temporarily shut down operations;
• restricted employees from going to work;
• subjected employees to a curfew that
affected hours worked;
• required the business to shut down for
periodic cleaning and disinfecting;

• caused a supply chain disruption (even if
the employer was an essential business
exempt from government orders);
• imposed a limitation on working hours
(even if the employer was an essential
business);
• affected the business in a way that it could
not operate in a comparable manner;
• affected an unbundled part of the business
in a way that the business part could not
operate in a comparable manner;
• restricted access to the physical workplace;
• reduced working hours because of
pandemic-related operating limitations;
• created limitations with more than a
nominal effect on the business;
• imposed limitations on the use of physical
space, affecting services;
• imposed limitations on size of gatherings,
affecting the business operations; or
• created limitations on the use of physical
space with employees who could not
perform comparable duties, responsibilities,
or services from home.
Every small business in America that was
subject to COVID-19 government orders that
caused a partial suspension of its operations will
qualify for the ERC during the periods when it
was affected by the government orders. Although
not law or legally binding authority, the
categories described in the FAQs and the JCT
reports should qualify.
Every small business whose supply chain
vendors were subject to government orders,
causing an indirect partial suspension of the small
business’s operations (unable to get parts,
supplies, or needed services) should qualify for
the ERC.
Essential small businesses exempt from
limitations on commercial activity, gathering size,
and travel will not qualify. But government orders
vary from location to location, without uniform
definitions of essential businesses or all-ornothing exclusions. As acknowledged in the
FAQs, like any other business, an essential
business may have been partially suspended by
government orders (for example, a hospital’s
nonessential services) or by the effect of a
government order on its suppliers (for example, a
manufacturer unable to procure needed parts).

So does every small business in America
qualify for the ERC? According to the guidance, a
business that did not lose enough business to fall
within the receipts safe harbor, whose workforce
was able to pivot to do comparable work and
serve customers in a comparable manner and
could not demonstrate more than a nominal
impact from government orders on its operations
would not qualify.
Everyone else will.