Almost a year after the employee retention credit was adopted as part of the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”), and nearly a month after the final Form 941, Employer’s Quarterly Federal Tax Return, claiming the credit for 2020 was due, the IRS issued Notice 2021-20 (the “Notice”), providing guidance on the credit. This is the second of three articles in our series looking at how the IRS’s guidance on the employee retention credit has changed over the past ten months. This article focuses on the first signs of trouble for employers that appeared in the frequently asked questions (“FAQs”) when they were updated in June 2020. The first article focuses on the approach the IRS took in the FAQs when initially issued in April 2020. The final article focuses on how Notice 2021-20 builds on those FAQs, and their June revisions, to narrow the scope of the credit and limit its availability.
Perhaps having come to believe that its approach to reading the statute as reflected in the FAQs—an approach entirely consistent with the language and purpose of the legislation—opened the barn door too wide, the IRS began to limit the availability of the credit as it made revisions to the FAQs. In June 2020, the IRS revised a number of FAQs providing additional guidance on what constitutes a “partial suspension.” (See earlier coverage.) Much of that guidance narrows the types of orders that constitute a partial suspension. For example, FAQ 30 was revised to indicate that an employer who maintains both essential and non-essential operations is considered to have a partial suspension if its non-essential operations are suspended as a result of a governmental order.
However, that relatively straightforward reading of the statute was accompanied by a new IRS-imposed requirement that the non-essential operations must constitute “more than a nominal portion” of the business. Similarly, changes to FAQ 34 require that many types of governmental orders must have more than a “nominal effect” on the employer’s business operations. The examples suggest that orders restricting the ability of a business to serve customers may not have more than a nominal effect, even if customers are required to wait outside in a line because of restrictions on the number of customers that may be served. (Apparently, the IRS believes that the patience of customers during a pandemic is unlimited and it should be assumed that all would-be customers will wait as long as necessary, however long that may be.)
In making these revisions, the IRS did not define or offer any insight into what constitutes a “nominal portion” of a business or a “nominal effect” on business operations. Perhaps more important, the IRS did not point to any statutory support for instituting this new “more than nominal” requirement in its informal guidance.
Tomorrow, we will look at the latest IRS guidance on the employee retention credit, Notice 2021-20.