If an Employer Voluntarily Suspends Operation of a Trade or Business or Reduces Hours due to COVID-19, is the Employer Eligible for the ERC?

The Employee Retention Credit (ERC) is a refundable tax credit provided by the IRS to eligible employers who retained their employees despite experiencing significant financial hardship due to the COVID-19 pandemic. One question that many employers have is whether they are eligible for the ERC if they voluntarily suspend operations of a trade or business or reduce hours due to COVID-19.

The answer is yes, under certain circumstances. The IRS has stated that if an employer suspends operations or reduces hours due to a government order or a lack of business due to COVID-19, then the employer may be eligible for the ERC. However, if the suspension or reduction is voluntary and not due to COVID-19, then the employer is not eligible for the ERC.

In order to be eligible for the ERC, an employer must also meet the significant decline in gross receipts test. This means that the employer’s gross receipts must have declined by more than 20% in a quarter in 2020 compared to the same quarter in 2019. Alternatively, an employer may meet the test if its gross receipts decline by more than 20% in any quarter of 2021 compared to the same quarter in 2019.

If an employer meets the significant decline in gross receipts test and retains its employees, it may be eligible for the ERC. The amount of the credit is equal to 50% of qualified wages paid to employees during the applicable period, up to a maximum of $5,000 per employee.

It is important for employers to keep accurate records of the reasons for any suspension or reduction in operations, as well as their gross receipts during the applicable periods. This will help ensure that they are eligible for the ERC and that they receive the maximum credit available.

In summary, if an employer voluntarily suspends operations or reduces hours due to COVID-19 and meets the significant decline in gross receipts test, it may be eligible for the ERC. Employers should keep accurate records and consult with a tax professional to ensure they are meeting all eligibility requirements and claiming the credit correctly.