Hello, Hello! Welcome to this week's installment of Employee Retention Credit questions and answers. I'm your host, Travis Watkins. Let's jump right in. We've got lots of questions here, but two of them are very important for what we've been seeing and what we're doing. And the first one has to do with the analysis of how to calculate the Retention Credit for your employees that you kept in 2020. It’s the one we're specifically talking about today because it's a little bit different, and so we'll jump right in. The way that you calculate the 2020 Retention Credit is laid out in this thing called the IRS note 2021-20. And it's a clarification of a bunch of different changes to the Retention Credit that the IRS has tried to give some instruction on. And it's actually kind of a surprising calculation.
So let's look at the rule first, they say this note that the period during which there is a significant decline in gross receipts. And now remember there's three different ways essentially to jump into a quarter, to qualify for a quarter in ERC. First of all, as if you've been fully or partially shut down by government order, second of all, if you've suffered a significant decline in gross receipts, and that means different things for different years. And third of all, if you have suffered some type of a supply chain disruption. So what we're talking about on this question is the second one, the significant decline in gross receipts. And how do you calculate it? They say it's determined by identifying the first calendar quarter in the year 2020 in which an employer's gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. I'm reading straight out of the law here. The period during which there is a significant decline in gross receipts ends with the quarter with the earlier of January 1st, 2021, or the calendar quarter that follows the first calendar quarter in which the employer's 2020 gross receipts are greater than 80% of its gross receipts for the same calendar quarter of 2019.
Okay. That's mouthful, let's break it all down. So you're looking at a 2020 quarter. You're trying to find a 50% reduction versus that same quarter in 2019 to compare it to, okay. So the example that they give right there in the IRS memo is this: they said an employer had a quarter, $100,000 dollars gross receipts. And in 2019 they had $210,000. So that right there is a greater than 50% reduction in gross receipts. So, boom, Q1 we know is going to qualify because it falls in that 50% or greater thing. The cool thing about this calculation though, is that let's take a look at quarter number two, in the example they say in 2020 quarter two, the employer made $190,000. And in 2019, that same quarter two, they had made $230,000. So that's only a 17% reduction. That's 83% is the exact amount of 2020 versus 2019. But that's 83% of what 2019 was. So that would be the end, you wouldn't otherwise be able to go beyond quarter two, but since this calculation is phrased the way that it is, it says that you get to include the quarter, right after that 50% reduction quarter. Then you're going to be able to include quarter number two. You're not going to be able to go on to quarter number three because it’s 80% or greater in quarter two, it's at 83%. So, under that one, not only would Q1 qualify under the significant decline in gross receipts rule, but quarter two's going to, even though it has the employer earning at least 80% of what they made in 2019, because of this rule of getting to follow the next quarter in for the purposes of the calculation.
So, very cool, very good question and something to be very aware of. Now if quarter two, in that example, had been less than 80%, you're going to be able to include quarter number two and quarter number three, which in that example is $230,000 made in quarter three of 2020 and $250,000 made in quarter three of 2019. So even though that's 92% made in 2020 of what they made in 2019, in that little example, if Q2 had not been 80%, you would be able to also include quarter three. Hopefully that's clear, a little bit confusing, but very important because you're going to get a trailing quarter whenever you can show that 50% rule.
Next one supply chain. We continue to get more and more questions over and over about the supply chain in this program. And let's break it down a little bit. The big confusion I think comes from the rule itself, and I'll just read it to you. If an employer's workplace is closed due to a governmental order for certain purposes, but the employer's workplace may remain open for other limited purposes, the employer's operations would be considered to be partially suspended if under the facts and circumstances, the operations that are closed are more than a nominal portion of its business operations and cannot be performed remotely in a comparable manner. So here we're talking to remember there's three ways in, going back into the Retention Credit. First, close down fully, or partially by governmental order. Second, if you had a significant receipt, significant decline in receipts or this third one supply chain disruption.
So, we're talking about part three supply chain disruption, what is it and what is considered to be more than a nominal portion of the business being affected by a supply chain disruption? So later in the rules, it gives us a little bit of some indication of what is nominal. And it says the mere fact that employer must make a modification to business operations due to a governmental order does not result in a partial suspension unless the modification has more than a nominal effect on the employer's business operations, whether a modification required by a governmental order has more than a nominal effect is based again on the facts and circumstances, a governmental order, that results in a reduction in employer's ability to provide goods or services in the normal course of the employer's business of not less than 10% will be deemed to have more than a nominal effect on the employer's business operations.
So there it is. 10% reduction of business deemed to have more than a nominal effect. So the way that that works, we've said it before, if part of your business was affected by a supply chain or had been somehow choked off because of a governmental order, something out of your control, then you're going to be able to use supply chain disruption as your way in for that quarter. It has some examples, occupancy restrictions at a restaurant with indoor dining service may result in an actual and more than nominal reduction to the restaurant's ability to service customers. So indoor dining service affected by governmental order and outdoor service. Not that's going to be significant, not nominal. And you would be able to use the supply chain in that circumstance. Occupancy however, a retailer with sufficient physical space to accommodate its customers, regardless of the restriction will likely not result in an actual and more the nominal reduction of the retail's ability to provide goods and services to its customer.
So, the difference there is there was enough space to be able to accommodate any like social distancing type orders, things like that. So it turns out that the thing that's in common with both of those examples and with both of those rules and explanations, is that the IRS has specifically said that it's going to turn on the specific facts and circumstances that are at issue in that unique situation. And what does that tell you? That is the warning bell, the sirens should go off, that it's all going to turn on a factual determination, and who's the best person? Who's the best professional to be able to help you if you, God forbid had to explain this to the IRS at some point in an audit, for instance, it's going to be a tax lawyer because we're trained to talk about facts and circumstances to be able to bolster certain facts and circumstances in order to fit within certain rules and guidelines.
All right. So, if you're looking at these, if you're confused, be sure and check with a tax lawyer to help you out with the Retention Credit, because at some point you may need them to shore up your facts and circumstances that were would be necessary to support your position on that quarter or quarters that you've taken under supply chain disruption for the Employee Retention Credit. We do those every day and we're here to help. There'll be notes here in the note section or on the podcast. If you're listening to it to help get you in touch with us to give you some assistance. All right. Thanks for watching and have a great day.