Tax Tips Logo ImageISSUE:

The Consolidated Appropriations Action, 2021 (CAA) – (enacted December 27, 2020) expanded the Employee Retention Credit to entities that received a PPP loan/grant and extended the credit through June 30, 2021.  A few weeks ago we looked at the concept of “subject to a governmental order to fully or partially suspend its business operations.”  On March 1, 2021, the IRS released Notice 2021-20 which addresses (over the path of 102 pages!) “ERC 2020.”  The Notice – nor the IRS ERC FAQ page – reflects the changes made by the CAA.

 

 

SITUATION:

Troas Bible College (TBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

TBC’s CFO called us back to further enquire about “governmental orders.”

“I’m still not clear on whether or not our institution was under a ‘governmental order’ to shut down.  Is there any more guidance on this issue?”

“Well,” we said, “the IRS has now issued Notice 2021-20 which gives a lot of information on the 2020 version of the Employee Retention Credit (ERC).  Specifically, the Notice defines governmental orders to 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.

“Further, the Notice states that, ‘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 relate to the suspension of an employer’s operation of its trade or business does not rise to the level of a governmental order for purposes of the employer’s determination of its eligibility for the employee retention credit.’  Hope that helps.” [Underline added.]

NOTE: The IRS Website, “FAQs: Employee Retention Credit under the CARES Act” has not been updated for the CAA, but generally the Qs and As still apply to the ERC.  It can be found at:

FAQs: Employee Retention Credit under the CARES Act | Internal Revenue Service (irs.gov)

 

RULES:                                                                        .

From IRS Notice 2021-20, “Governmental Orders”:

  1. Governmental Orders

Question 10: What “orders from an appropriate governmental authority” may be taken into account by an employer for purposes of determining eligibility for the employee retention credit?

Answer 10: Orders, proclamations, or decrees from the Federal government or any State or local government may be taken into account by an employer as “orders from an appropriate governmental authority” only if they limit “commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19)” and relate to the suspension of an employer’s operation of its trade or business. Orders that are not from the Federal government must be from a State or local government that has jurisdiction over the employer’s operations. These orders are referred to as “governmental orders.” Whether orders, proclamations or decrees are governmental orders is determined without regard to the level of enforcement of the 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 relate to the suspension of an employer’s operation of its trade or business does not rise to the level of a governmental order for purposes of the employer’s determination of its eligibility for the employee retention credit.

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.

Whether the operations of a trade or business are considered essential or non-essential will often vary from jurisdiction to jurisdiction. An employer should determine whether it is operating an essential or non-essential business by referring to the governmental order affecting the employer’s operation of its trade or business.

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 non-essential 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. The governor’s order is a governmental order limiting the operations of non-essential businesses; therefore, employers with non-essential businesses to which the governmental order applies may be considered eligible employers for purposes of the employee retention credit.

Example 2: Mayor of City Y holds a press conference encouraging 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.

 

BOTTOM LINE:

  • The Employee Retention Credit (ERC) was expanded and extended with the enactment of the CAA.
  • We are hearing from numerous institutions who are finding that they may qualify for the 2020 ERC without a 50% decline in gross receipts.
  • Carefully chart your documentation in order that you do not “double dip” with PPP1, PPP2, HEERF1, HEERF2, HEERF3, ERC 2020, and/or ERC 2021.
  • We continue to await guidance on “ERC 2021.”

 

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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