On March 1, 2021, the IRS issued Notice 2021-20, which provides guidance for employers claiming the Employee Retention Credit (ERC) for 2020. This Notice provided several key FAQs which allow law firms to better apply fact patterns under the “partial suspension” of trade or business operations test for determining eligibility for this refundable credit.

What if our firm didn’t experience a drop in overall revenue for 2020 and we received PPP funds; should I keep reading?

YES!       There are two tests to qualify a business for the ERC:

  • The business experienced a large drop in gross revenue in 2020 when compared to 2019.

OR

  • The business fully or partially suspended operations due to a governmental order related to COVID between March 12, 2020, and June 30, 2021.

You say refundable credit- how much are we talking about here?

For 2020, up to a $5,000 credit per employee for wages paid to employees during the period your firm experienced a partial shutdown! The credit is based on 50% of wages paid plus the allocable portion of health care expenses, limited to $10,000 per employee, during the period. The credit is claimed by amending IRS Form 941 for the quarter in which the wages and related payroll taxes were incurred.

What does the IRS consider a partial suspension?

An employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a “nominal portion” of its business operations are suspended by governmental order.

How does the IRS define “nominal portion”?

An employer’s suspended business operations will be deemed to constitute more than a nominal portion of its business operations if either (i) the gross receipts from that portion of the business operations are not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019), or (ii) the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).

Ok, so what are you telling me?

Courts were shut down by governmental order by way of Chief Justice Cheri Beasley of the Supreme Court of North Carolina from March 13, 2020, through May 30, 2020. If you or your firm practices in the courts, you may have experienced partially suspended operations. Courts in geographical areas in which you litigate may have continued to experience disruptions, limitations, and postponements due to COVID-19 beyond May 30, 2020. We will work with you to determine what quarters can be used to determine qualifying wages for the ERC.

It sounds too good to be true, so what’s the catch?

Here are a few important points:

  • Obviously, you must clear the “partial suspension of operations” hurdle. This means that if you do not have a litigation component in your practice, you probably do not qualify for ERC using this test.
  • You cannot use the same wages allocated to apply for PPP forgiveness to obtain the ERC. This could be a tedious exercise, but we are here to help. If you have not applied for PPP forgiveness, please DO NOT apply until discussing with us. There are other qualified expenses pertaining to PPP other than payroll that can be used for forgiveness.
  • If your firm averages more than 100 Full-Time Employees (FTEs), only wages paid to an employee other than to provide services will qualify. You must have paid those employees even though they could not perform any work.

What are our next steps?

We are here to help. Please reach out to us if you would like more information on whether you may qualify for the ERC. We will assist you in documenting partial shutdown, analyzing wages paid, and interaction with PPP, as well as claiming the credit for eligible quarters in 2020.

For information regarding court closures and other COVID-19 limitations: https://www.nccourts.gov/covid-19

To read the IRS Notice providing guidance for the ERC for 2020: https://www.irs.gov/pub/irs-drop/n-21-20.pdf

Jason King, CPA
Jason King, CPA

Jason is a Manager in DMJ’s Wilmington, North Carolina office. Jason works with audit and accounting clients in the manufacturing, construction, pharmaceutical, and retail industries as well as nonprofits. He is also well versed in individual and business taxation and related planning including choice of entity.

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