Employee retention credit – eligibility under the suspension test

In August, the IRS released extensive guidance on the employee retention credit (ERC), providing helpful clarity on several questions previously surrounding the credit. For additional details, please see our previous tax alerts on Notice 2021-49 and Revenue Procedure 2021-33. However, areas of uncertainty remain, and the IRS has informally remarked that it does not anticipate issuing additional guidance on the ERC, at least in the near future. As such, in some cases, taxpayers will need to take reasonable positions absent concrete guidance with respect to eligibility and the computation of the credit. It is imperative that such positions have foundational merit to bolster their chances of being sustained in the event of an IRS audit.

Suspension test

The area of the ERC that arguably remains most unclear is the suspension test for determining credit eligibility. An employer will satisfy this test, if they experience a full or partial suspension or modification of operations during any calendar quarter in 2020 or 2021 (though the Senate version of the bipartisan infrastructure plan would revoke the availability of the credit in the fourth quarter of 2021 as a revenue-raiser) due to orders from an appropriate domestic governmental authority (federal, state or local) limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19. It is critical to note that to be eligible under this test, the employer must be more than nominally impacted by the suspension or modification or could not continue comparable operations through telework.

The highly subjective, facts-and-circumstances nature of the suspension test analysis makes it difficult to conduct; it also consequently leaves a great deal of room for interpretation. Questions we have received regarding eligibility via suspension include:

1. Can eligibility be achieved by following recommendations provided in guidance issued by the Centers for Medicare and Medicaid Services?
2. Can auto dealers qualify under the suspended supplier exception on account of the ongoing global shortage of semiconductor chips?