A full shutdown of the business may be easy to identify, however, a partial suspension of business operations is much more gray. In its FAQs, the IRS uses the term “nominal” in two different contexts for the purposes of evaluating whether a business is subject to a partial shutdown. Unfortunately, in its FAQs, the Service never expanded on what, exactly, “nominal” means.
Notice 2021-20 provides guidance for both situations.
More than a Nominal Portion of its Business Operations
In Q&A #11, in determining when an essential business that was allowed to remain open may be considered to have a partial suspension of operations, the Service provides that a partial suspension has occurred if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order. The Notice defines the term “more than a nominal portion of its business operations” as follows:
Solely for purposes of this employee retention credit, a portion of an employer’s 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 is 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).
The Notice then provides the following example:
Example: Employer F, a restaurant business, must close its restaurant to onsite dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. Employer F is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. On-site dining is more than a nominal portion of Employer F’s business operations. Employer F’s business operations are considered to be partially suspended because, under the facts and circumstances, more than a nominal portion of its business operations—its indoor and outdoor dining service—is suspended due to the governmental order.
Based on the conclusion reached in the example, it can be presumed that the indoor and outdoor dining service deemed as “more than nominal” would have been measured as bringing in at least 10 percent of the restaurant’s total 2019 gross receipts, or the hours of service performed by employees for the indoor and outdoor dining was at least 10 percent of total employee hours in 2019.
More than a Nominal Effect on the Business Operations
Next, in Q&A #17, the Notice addresses when nonessential businesses have suffered a partial shutdown. The IRS first allows the nonessential business to use the same test allowed for essential businesses as described above: if some part of the business’s operations are closed, and the portion that is closed is more than a “nominal portion of its business operations,” the business has been partially suspended.
Q&A #17 then provides that in situations where the business remains completely open but its operations are subject to modification due to a government order (for example, satisfying distancing requirements), the modification will create a partial shutdown if it has “more than a nominal effect” on business operations.
Unlike the definition of a “nominal portion of a business,” the Notice neglects to provide a quantitative test to determine whether a modification has a “more than nominal effect” on business operations. Instead, in Q&A #18 it provides a number of factors to be taken into account in determining whether a governmental order has “more than a nominal effect” on business operations.
It begins by identifying the following modifications that are contemplated by Q&A #17:
- Limiting occupancy to provide for social distancing,
- Requiring services to be performed only on an appointment basis (for businesses that previously offered walk-in service),
- Changing the format of service (for example, restrictions on buffet or self-serve, but not prepackaged or carry-out), or
- Requiring employees and customers to wear face coverings.
The Notice then provides that whether a modification required by a governmental order has more than a nominal effect on the business operations is based on the facts and circumstances, but goes on to offer the following test:
“A governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employee’s business of not less than 10 percent will be deemed to have more than a nominal effect on the employer’s business operations.”
This definition is significantly less useful than the test provided for determining whether a “more than nominal portion of its business operations” has been shut down. This particular test does not provide guidance as to how the business might go about proving that 10 percent reduction in ability to provide goods or services; unlike the previous test, no numerator or denominator is identified.
The Notice does go on to make clear, however, that modifications that alter customer behavior, such as requiring masks, or altering store aisles to enforce social distancing will not result in a more than nominal effect on the business operations. The Notice also requires documentation to substantiate a more than nominal effect has taken place in Q&A #70.
As has been the trend with ERC guidance, when one question is answered, more arise. We now have a formula for determining whether a “more than nominal portion” of a business operation has been shut down. Determining whether a modification has had a “more than nominal effect” on a business’s operations remains far less clear.
By: Tony Nitti, CPA, MST
By: Amie Kuntz, CPA, MA
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Notice 2021-20 provides much needed guidance on the 2020 Employee Retention Credit (ERC), including a definition of the word “nominal” as it is used in in determining whether a business has sustained a partial shutdown. As a reminder, the ERC may be available to employers if they have either a full or partial shutdown as a result of a qualifying governmental order, or a significant decline in gross receipts.