Defining More than Nominal Effects for ERC Filings
The devil is in the details, they say. Even more so as those details and their definitions change over time.
As time passes and details and interpretation shift, the guidelines governing the Employment Retention Credit program (ERC) that has helped so many businesses survive and thrive through the COVID-19 crisis have become clearer. The latest update to the ERC, IRS 21-20, clarifies the many qualifying factors for ERC claims. One definition in particular, “more than nominal” interruption, has caused stress and anxiety to business owners.
The ERC program was created as a part of the federal government’s CARES act, a response to the business and financial stresses caused by the COVID-19 response. As companies were forced to close and partially close for safety reasons, the ERC program has enabled businesses that remained open and employing people to reclaim credit of up to $26,000 per W-2 employee.
That said, as the IRS changed eligibility requirements, concern started to increase about the possibility of being audited for proper eligibility.
What does “More than Nominal” mean?
The short answer is ten percent. If government closure policies impacted ten percent of your business operations, you might meet the eligibility requirements for the ERC program.
The program was criticized early on for lack of specific definitions around several aspects of eligibility. Fortunately, IRS Notice 2021-20, published in March 2021, documented a more precise definition.
Despite this effort at more clarity, however, some confusion remains.
In short, there are two tests the IRS has established to understand what “more than nominal” means to specific businesses – gross receipts and employee hours. If your gross receipts for a portion of your business were reduced by ten percent or more in 2020 or 2021 compared to the same quarter in 2019, this could be used to show a more than nominal effect. Alternately, suppose the employee hours spent on activity within the business that was discontinued due to COVID-related government orders accounted for ten percent or more of the total hours worked by all of your employees. In that case, that is another way of defining “more than nominal” for you.
The concern among businesses, of course, is as these definitions become clearer and interpretations shift, the impact on a possible ERC filing could be significant.
What does it mean to me?
The number one concern among businesses regarding the “more than nominal” and other definitions impacting ERC eligibility is simply you want to prepare documentation that shows a more than ten percent impact of COVID regulations on your business.
If the IRS requests more information, you want to be prepared to document the impacts of COVID on your business and prove your eligibility without any issues. It is imperative to understand all implications of governmental policies impacting your ability to remain open and do business so you and your team can respond effectively if needed.
Using an experienced team with a deep understanding of the ERC program and process is one way to be sure you’re not only eligible for the credit but prepared for any eventuality after you receive it.
At ERC Specialists, we’ve been focused on this specific program since it was passed as a part of the CARES Act. We are one of the teams working in this space that has tracked, evolved, and responded to every change as they were made. As a result, we’ve been able to not only help thousands of businesses with hundreds of thousands of employees apply and qualify for the credit, but we’ve also been able to support them with the education and documentation they may require in the event of IRS examination or audit.
We regularly hear from clients that their in-house tax experts or contract CPA firms recommend working with ERC Specialists rather than attempting to handle their applications in-house because the details are just that specific. Our best advice is simple. First, be sure you understand the program requirements and how to adjust as they change. And second, be sure to utilize expert guidance to handle your application.