Understanding the ERC’s More than Nominal Requirements

August 18, 2021

At a glance:

  • The main takeaway: The IRS has clarified the definition of “more than nominal” as it relates to partially suspended operations for ERC eligibility, underscoring the importance of a carefully calculated and thoroughly documented credit to mitigate audit risk.
  • Impact to your business: Companies now have a clear benchmark to assess whether they satisfy the Eligible Employer requirements when claiming the ERC due to partially suspended operations, but there is still room for interpretation.
  • Next steps: Businesses that have claimed or are considering claiming the ERC should work with a knowledgeable tax advisor to understand the implications of the newly defined requirements.

Claiming the ERC because of partially suspended operations? Contact Aprio’s expert ERC team to assess your eligibility.

The full story:

Since its inception, the Employee Retention Credit legislation has stated that a company can only qualify due to a partial suspension of operations if the applicable government orders suspended more than a nominal portion of its operations. However, the IRS did not define what “more than nominal” meant as it related to the ERC until nearly a year later through IRS Notice 2021-20, published March 1, 2021.

Despite the additional guidance, there is still significant confusion across businesses and tax professionals alike regarding the practical application of a more than nominal impact when qualifying for and calculating the credit.

After consulting with IRS representatives, legal counsel, and other industry experts, Aprio is ready to set the record straight.

What does “More than Nominal” ERC mean?

The latest IRS guidance sets the benchmark for “more than nominal” at 10% and provides two tests a business can use to assess the proportion of its suspended operations. According to this guidance, any suspended portion of a business’s operations is deemed to be more than nominal if:

Gross receipts from that portion in 2019 account for 10% or more of a business’s total gross receipts for the same calendar quarter in 2019;


Employee hours worked in 2019 related to that portion account for 10% or more of the total hours worked by all employees in the same calendar quarter in 2019.

It’s easier to think of the “more than nominal” definition in terms of your company’s activities or business lines. If the portion of your company’s operations (or the activity/business line) that was suspended by government orders made of 10% of your gross receipts in 2019, then that constitutes more than a nominal portion of your business operations.

Still not following? Consider this “more than nominal” ERC example:

A brewery founded in 2018 consisted of two primary business lines: tasting room operations and bottle sales. In all quarters of 2019, the tasting room portion of the business made up 40% of the gross receipts. In 2020, government orders required the brewery to suspend all tasting room operations, causing the brewery to experience a partial suspension of operations. Although the brewery’s primarily business line – the bottle sales – was able to continue, the suspended portion of the business amounted to a more than nominal portion because the tasting room operations were responsible for more than 10% of the gross receipts in 2019. Therefore, the brewery qualifies for the ERC.

How does it impact your eligibility?

While everyone welcomed the long-awaited guidance on such a vague issue, many found the answer surprising – 10% of a company’s business seemed much larger than a “nominal portion.” Some industry experts interpreted the legislation and subsequent guidance as creating a safe harbor but not a mandatory eligibility requirement. Supporters of this opinion argued companies that experienced partial operational suspensions for activities that amounted to less than 10% of the business should not be automatically denied the credits; however, those credits could be at risk in the future in the event of an audit.

In order to advise our clients to the best of our ability, Aprio needed answers. So we reached out to our legal counsel and IRS representatives. Based on those conversations, Aprio takes the approach that the IRS guidance on defining “more than nominal” is not a hard and fast rule. Instead, it provides a benchmark that allows employers to make the decision to claim the ERC based on their own risk tolerance. It also underscores the importance of documenting and substantiating your credits – something we stress as a priority to all of our clients.

For a business that is below the “more than nominal” threshold, the benefits of claiming the credit and maintaining payroll may vastly outweigh the risks of a future audit; other companies may prioritize taking the safe route. No matter your situation, Aprio can provide all the critical analysis and advisory services you need to make the decision that is best for your company, including the preparation of critical documentation to support your credit claim.

The ERC is a hugely beneficial yet intricate tax credit that seems to get more complex by the day. If you think your company may qualify but you’re not sure of the risks, Aprio can help. Our dedicated ERC team can provide a detailed assessment of your company’s unique position and contextualize the risk relative to your needs. Contact us today to get started.

Disclaimer for services provided relative to SBA programs and the CARES Act

Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.

The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.

Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.

You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.

In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.

Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.

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