Table of Contents
Understanding whether your business qualifies for the Employee Retention Credit through the suspension test requires navigating complex IRS rules and documentation requirements. This guide breaks down everything you need to know about qualifying government orders, the nominal portion threshold, and recent enforcement developments.
- Introduction: Why ERC Suspension Still Matters
- What Is the ERC Suspension Test?
- Understanding “More Than a Nominal Portion”
- What Counts as a Qualifying Government Order
- Recent Developments: Court Views and IRS Enforcement
- How to Apply the ERC Suspension Test
- FAQs About ERC Suspension
- Why Choose Our Firm
- Conclusion and Next Steps
Introduction: Why ERC Suspension Still Matters in 2024–2025
Many businesses that filed Employee Retention Credit claims in 2020 and 2021 are now facing IRS scrutiny, with the suspension of operations test sitting at the center of most audits. The Internal Revenue Service was flooded with questionable and potentially fraudulent claims, leading to an increased processing time for ERC claims from 90 days to 180 days or more. The agency even announced a suspension to the processing of new ERC claims on September 14, 2023, signaling just how seriously they’re examining these filings.
The term erc suspension refers to a testing method for tax credit eligibility related to COVID-19—specifically, qualifying for the Employee Retention Credit ERC based on full or partial suspension of business operations by a government order related to the pandemic. This partial or full suspension standard is one of the primary paths to ERC eligibility. This pathway stands separate from the alternative gross receipts test that measures revenue decline.
Understanding the ERC Suspension Eligibility Path
It’s worth noting that “ERC” has different meanings depending on context. ERC stands for Electromechanical Roll Control in automotive technology, a type of active suspension system where sensors analyze speed and steering to stabilize vehicles. Electromechanical Roll Control uses electric actuators instead of hydraulics to control anti-roll bars. However, for tax purposes, ERC refers exclusively to the Employee Retention Credit—and that’s our focus here.
Even though the ERC program has ended for new wages, the statute of limitations, amended returns, and IRS examinations continue into 2025 and beyond. Many businesses relied on non-binding guidance from the CDC or OSHA and are now learning those recommendations may not satisfy the government order requirement for ERC purposes. This article provides a practical, plain-English explanation of the partial suspension test, the “more than nominal” standard, and current IRS and court positions so business owners and their trusted advisor can reassess their ERC claim documentation.
What Is the ERC Suspension Test?
The Employee Retention Credit is a refundable payroll tax credit for wages paid to employees during 2020 and 2021. Created by the CARES Act and later expanded by the Consolidated Appropriations Act of December 2020 and the American Rescue Plan Act of March 2021, this tax credit was designed to help employers retain workers during COVID-19 disruptions.
A business qualifies for ERC under two core paths:
- A significant decline in gross receipts compared to the same calendar quarter in 2019
- A full or partial suspension of operations due to a governmental order related to COVID-19
The “full or partial suspension” test focuses on how a specific government order limited business activities compared to 2019 operations—not just general economic hardship or changes in customer behavior. To qualify for the Employee Retention Credit, a business must have experienced a full or partial shutdown in 2020 or 2021 due to a government order related to COVID-19.
Key timeframes for the credit include:
- March 13, 2020 through December 31, 2020 for the original ERC under the CARES Act
- January 1, 2021 through September 30, 2021 for expanded ERC (extended to December 31, 2021 for recovery startup businesses)
- First quarter through fourth quarters of eligibility periods must be evaluated separately
A full shutdown means a government mandate required closing your doors entirely—think of the March through May 2020 indoor dining bans that forced restaurants to cease on-premise service completely. A partial suspension of operations applies when a meaningful part of operations was restricted but some business activities continued, such as capacity restrictions or bans on specific services.
Understanding this distinction matters because the IRS has indicated that a partial suspension of operations occurs when a business experiences a temporary shutdown or reduction in operations due to a government order related to COVID-19, but not all of its operations are affected. This nuance determines whether your claim stands up to examination.
Understanding “More Than a Nominal Portion” of Your Business
Not every minor disruption qualifies under the partial suspension test. The IRS uses a “more than nominal portion” threshold to determine whether a partial suspension is significant enough to support ERC eligibility.
IRS Notice 2021-20, issued March 1, 2021, defines this standard quantitatively. A portion of the business is considered more than nominal if it meets either:
- At least 10% of the business’s 2019 gross receipts came from the suspended operations
- At least 10% of total 2019 service hours were attributable to the affected segment
To qualify for a partial suspension, the affected portion of the business must have accounted for at least 10% of revenue or employee hours in 2019. This is a critical threshold that many ERC promoters failed to properly calculate.
A business is considered to have experienced a partial suspension of operations if the shutdown affected more than a nominal portion of the business’s operations, as defined by IRS guidelines. A partial suspension is defined as a temporary stoppage of a portion of operations, which must affect more than a nominal portion of the business’s operations to qualify for the Employee Retention Credit.
Consider these examples:
- A restaurant generating 40% of 2019 revenue from on-premise catering and events that were fully prohibited by executive order in Q2 2020 clearly exceeds the 10% threshold and qualifies for ERC despite continued takeout operations
- A medical practice where “non-essential” elective procedures comprised 20% of 2019 billings would qualify if those procedures were banned by a state health order
- A professional services firm with only a portion of in-person consultations (representing 8% of billable hours) banned would fail the nominal portion test
If the affected activity falls below 10%, the IRS position is that there is no qualifying partial shutdown—even if the business felt significant operational pain. To qualify for the ERC under a partial suspension, the shutdown must have impacted more than a nominal portion of the business, meaning it must be significant enough to affect operations meaningfully.
What Counts as a Qualifying Government Order (and What Does Not)
This is where many ERC claims fail. Government orders must impose binding requirements or repercussions for noncompliance to qualify as a governmental order impacting business operations. The distinction between mandatory orders and voluntary guidance is critical.
A qualifying governmental order must come from a federal, state, or local appropriate governmental authority with jurisdiction over the business and must be mandatory. Examples include:
- Executive orders from governors (e.g., statewide indoor dining bans, capacity limits)
- Emergency proclamations with enforcement mechanisms
- State or local health department orders
- Occupational Safety directives with compliance penalties under law
Not all guidelines or recommendations from agencies like the CDC or OSHA qualify as government orders for the purpose of claiming the Employee Retention Credit. Only legally binding orders that impose specific requirements are considered valid for eligibility. The IRS has consistently emphasized this point with emphasis added in its guidance documents.
What does NOT qualify:
- CDC social distancing recommendations
- Standard OSHA advisories without enforcement mandates (though OSHA recommendations may qualify if a separate order mandate compliance)
- “Safer at home” suggestions from press conferences
- Industry association protocols
- Internal corporate policies based on disease control guidance, even if followed to protect health administration and safety
General disruptions to business activities caused by the pandemic are not sufficient to qualify as a partial suspension of operations under government orders. Your business being partially suspended due to customer fear or supply issues doesn’t meet the standard—you need a specific, enforceable governmental order.
To support an ERC claim, employers should document specific order numbers, issuance dates, and operative language. For example: “Executive Order 202.10 issued by Governor Cuomo on March 16, 2020, mandating closure of all indoor dining establishments” provides the specificity needed.
Recent Developments: Court Views and IRS Enforcement of ERC Suspension
Although ERC is a tax credit, courts and the IRS have increasingly treated it as a narrowly available benefit with strict documentation requirements—quite different from the Paycheck Protection Program’s broader access.
Courts distinguish between “presumption-in” programs like PPP loans, where eligibility was broadly granted, and “presumption-out” programs like ERC, where the taxpayer bears the burden of proving qualification. This distinction has significant implications for refund suit outcomes and claim disallowance rates.
Recent court rulings have consistently sided with the IRS where businesses:
- Relied solely on generalized COVID-19 disruptions without specific government mandates
- Cited supply chain problems or reduction in customer traffic unconnected to orders
- Based claims on voluntary safety measures rather than mandatory restrictions
- Failed to document the nominal portion calculation with 2019 baseline data
The IRS has issued over 28,000 audit letters as part of ERC compliance campaigns targeting an estimated $86 billion in potentially improper claims out of $230 billion processed. This isn’t theoretical risk—it’s active enforcement affecting eligible employer claims across all industries.
Key lessons from recent enforcement:
- Keep contemporaneous records of orders, internal memos, schedules, and operational logs
- Many businesses that used ERC promoters are seeing 20-30% disallowance rates in exams
- The IRS offers settlement initiatives with reduced penalties for voluntary disclosure before audit
- Form 941-X amendments have extended statutes of limitations (up to 5 years for 2020 claims)
The Internal Revenue Code sections governing ERC continue to be interpreted strictly. Businesses that filed without proper documentation of how they qualify under either the gross receipts decline or suspension test face serious exposure.
How to Apply the ERC Suspension Test to Your Business
Here’s a step-by-step framework for evaluating whether your business qualifies under the partial suspension test—useful whether you’re filing a new claim or reviewing an existing one.
Step 1: Identify All COVID-Related Government Orders
Compile every executive order, health department mandate, and emergency proclamation from your jurisdiction covering 2020-2021. Use state archives or tools like ERC.today to ensure complete coverage. Document orders from federal, state, and local levels.
Step 2: Map Orders to Specific Dates and Operations
Create a calendar showing when each order took effect and was lifted. Match these to your business operations—for example, a gym operating at 25% capacity from March 15 through May 1, 2020, due to a specific order.
Step 3: Segment Your Business Lines
Identify which specific activities were limited or closed. For a fitness center, this might mean separating indoor classes from outdoor training. For a restaurant, distinguish dine-in from takeout and delivery.
Step 4: Quantify Using 2019 Baselines
Calculate the 2019 revenue or service hours for each affected segment. If your suspended line of business represented only a portion of total operations, determine whether it exceeds the 10% nominal threshold.
Step 5: Align with ERC Quarter Eligibility
Match your analysis to specific quarters. A process that shows suspension qualification in Q2 2020 but gross receipts qualification in Q3 is perfectly valid—eligibility can differ by quarter.
Example Applications:
- A manufacturer whose assembly line (15% of 2019 receipts) was halted because a parts supplier was subject to its own government order qualifies—but must document the supplier’s order
- A professional services firm with 12% of billable hours in banned in-person consultations would qualify despite overall revenue growth
- An essential business like a grocery store may still qualify if specific operations (like a deli counter or seating area) representing more than 10% of 2019 revenue were restricted
Employers who used third-party ERC promoters should request an independent review by a qualified tax professional. If the original filing never documented specific government orders or calculated the nominal portion properly, your claim is vulnerable to failure upon examination.
FAQs About ERC Suspension and Government Order Eligibility
These questions address common pain points that emerge during IRS audits and claim reviews.
Can my business qualify for ERC under the suspension test if our revenue actually increased in 2020 or 2021?
Yes. Revenue growth does not automatically disqualify a business from the suspension test. The gross receipts test and partial suspension test are alternative paths to qualify for the ERC. If a more than nominal portion of your operations was restricted by a binding government order, you may still be an eligible employer regardless of overall money coming in. Many businesses saw certain segments restricted while others thrived.
Do capacity limits (e.g., 25% or 50% occupancy) count as a partial suspension?
Capacity restrictions imposed by a binding governmental authority can constitute a partial suspension for ERC purposes—particularly for hospitality, gyms, event venues, and group meetings spaces. The key is whether the capacity limit affected more than 10% of your 2019 revenue or hours. A restaurant at 50% capacity that lost 35% of dine-in receipts would typically qualify.
Is a local health department recommendation enough, or does it have to be labeled an “order”?
The label matters less than enforceability. Review the exact language: does it say “shall” or “must” versus “should” or “recommend”? Look for penalties, enforcement mechanisms, or references to legal authority. A letter from a health administration office suggesting certain practices is not the same as an order mandating them.
Can supply chain disruptions or vendor shutdowns qualify me under the suspension test?
Indirect impacts can qualify, but only when tied to a government order affecting a key supplier that caused more than nominal disruption to your operations. You’ll need documentation of the supplier’s government order plus evidence showing how it impacted your business—affidavits, canceled orders, and production records help establish this chain.
What if my CPA originally said we didn’t qualify, but an ERC promoter later filed large claims?
This situation demands a second opinion from an independent tax professional. Many promoters filed claims without proper analysis of eligibility requirements, leaving businesses exposed to claim disallowance, penalties, and interest. Consider protective actions including potential amended returns if the promoter’s suspension analysis appears weak.
How long should we keep ERC suspension documentation?
The IRS generally requires records for at least four years after the date the tax becomes due or is paid. However, given extended statutes of limitations on amended returns and ongoing compliance campaigns, retaining documentation through at least 2029 for 2021 claims is prudent. Keep copies of government orders, internal memos, revenue reports by segment, and your nominal portion calculations indefinitely.
Why Choose Our Firm to Review Your ERC Suspension Claims
ERC rules are highly technical and continue to evolve through IRS guidance and court decisions. Businesses benefit from working with advisors who focus on both maximizing legitimate credits and minimizing audit risk—a balance that many ERC promoters failed to strike.
Our firm offers:
- Deep experience with ERC calculations under both gross receipts and partial suspension test methodologies
- Familiarity with IRS Notices 2021-20, 2021-23, and 2021-49 and active monitoring of new compliance campaigns
- Documentation support that helps you compile, organize, and explain government orders, operational impacts, and nominal portion analysis in language exam agents understand
- Direct access to licensed CPAs who work as your trusted advisor throughout the process
- Fixed-fee review options with transparent communication about your claim’s strengths and vulnerabilities
- Support during IRS examinations, appeals, or any contact from the IRS regarding your filing
We understand that many businesses filed claims through promoters who made the process seem simple but left critical documentation gaps. Our approach prioritizes substance over speed—validating legitimate claims while identifying and addressing weaknesses before they become audit problems.
Conclusion and Next Steps
ERC based on suspension of operations remains both valuable and risky. The government is closely scrutinizing whether a true, more than nominal suspension occurred due to qualifying orders—and businesses with thin documentation face serious refund exposure and potential penalties.
The main actionable takeaway: verify that you can point to specific government orders, clearly connect them to limited operations, and document the nominal portion math for each affected quarter. Whether you’re an employer who already filed or one still evaluating the suspension path, this analysis is essential.
If you’re unsure about past ERC filings—or received a letter from the IRS questioning your claim—don’t wait for the statute of limitations to close on amended payroll returns. Contact our office to schedule an ERC review or consultation. We’ll help you assess your eligibility, strengthen your documentation, and prepare for potential examination. Call us today, send an email, or use our online request form to get started with a knowledgeable partner for ERC suspension analysis and potential IRS defense.
