Key Takeaways:
- Government shutdowns occur when Congress fails to enact 12 appropriation bills for the next fiscal year of funding
- The COVID-19 pandemic also caused shutdowns across the nation, when the government ordered businesses to close and Americans to stay at home
- Significant government shutdowns happened in 1995, 2013, and 2018, and there have been 21 gaps in funding, full or partial, since 1976
- Seven implications of a government shutdown for businesses include:
- Delays in loan application processing
- Slowdown of IRS tax services
- Delays in the hiring process
- Pauses on government contracts
- Ceasing business operations
- Loss of revenue
- No OSHA inspections
- The employee retention tax credit (ERTC), introduced in the CARES Act, was meant to aid businesses during the COVID-19 shutdowns, and eligible businesses may be able to get a credit of up to $26,000 per employee
The U.S. government relies on a budget for each fiscal year, just like a business does. Laws were put in place in the 1970s that require the government to shut down if Congress cannot enact all appropriation bills for the next year of funding, so shutdowns often happen at the end of the year. Congress and the current administration narrowly avoided a shutdown at the end of 2022.
However, as the COVID-19 pandemic showed, shutdowns can happen because of global or national crises like a pandemic. Businesses all across the country had to shut down, at least temporarily, to comply with stay-at-home orders and gathering restrictions issued by the government.
Government shutdowns impact government employees, citizens that receive government services, small businesses, nonprofits, and the economy at large. Many people rely on programs and services to stay afloat, and when these services aren’t accessible or when delays impact financial transactions, individuals and businesses alike can suffer. This is why the pandemic, which sparked closures that didn’t have a precise end date, led to the creation of many new financial relief programs.
This guide covers everything you need to know about government shutdowns. We’ll walk through what causes them, a current U.S. government shutdown update, how the pandemic shutdown was different, significant shutdowns in U.S. history, and seven implications for businesses.
What Is a Government Shutdown?
Congress must pass appropriations each fiscal year for the following year of funding, and then the president signs the budget legislation. There are 12 appropriations bills for each of the 12 appropriations subcommittees, and when these funding bills are not enacted on time each year, federal agencies must stop providing certain services until they go through. Since 1976, there have been 21 gaps in funding, which include at least partial government shutdowns, ranging from one day to 34 days.
Not all services cease if the government does, however. Essential services that continue to run include these:
- Social Security payments
- Medicare and Medicaid payments
- Medical care in hospitals
- Law enforcement
- Protecting the border
- Maintaining the power grid
Even though these services generally continue in a government shutdown, some services related to them may shut down, and there may be significant delays in receiving the usual services. Every federal agency has a plan in place in the event of a shutdown – a plan that relates to which services will continue and which staff members will be furloughed.
Agencies like the Environmental Protection Agency (EPA), for example, may stop doing regular site inspections, national parks may stop accepting visitors, and the National Institutes of Health (NIH) would stop taking new patients.
Employees who are furloughed during a government shutdown don’t receive their paychecks, and they cannot work, but they are guaranteed to receive back pay. This component changed in 2019 with the Government Employee Fair Treatment Act. Some government employees have continued to work in past shutdowns while not receiving their pay at the time they usually would have expected it.
Government Shutdowns and COVID-19
Not all government shutdowns are related to approving the budget for the new fiscal year. At the beginning of the COVID-19 pandemic in 2020, everything shut down so people would stay at home and help stop the spread of the virus. Businesses of all kinds had to temporarily shut their doors to comply with the orders.
Certain industries were particularly impacted by these shutdowns. The Bureau of Labor Statistics reported in 2020 that these sectors were the most exposed:
- Entertainment, including amusement parks and casinos
- Restaurants and bars
- Personal service providers, including barbers and dentists
- Sensitive retail, including car dealerships and department stores
- Travel and transportation
- Sensitive manufacturing providers, including car and aircraft makers
Businesses and government agencies across the country saw major impacts because of COVID-related government orders and shutdowns. Many are still trying to stay afloat, even as restrictions have ended, and some businesses have unfortunately had to close permanently. The government created forms of relief like the Employee Retention Tax Credit (ERTC) to help support businesses through the pandemic. You may still be able to apply and receive the ERTC for 2020 and 2021.
Other Government Shutdowns of Note
The government just recently avoided another shutdown. In late 2022, the new fiscal year started on October 1, 2022, but as mid-December was approaching, Congress had yet to enact the bills that set discretionary spending for the year. Had the government failed to do so by December 16, 2022, the government would have shut down; however, Congress voted to pass the Consolidated Appropriations Act of 2023, and the president then signed the new spending bill, narrowly averting a shutdown.
There have been quite a few shutdowns in the last few decades because this process was held up. Here are three relatively recent significant government shutdowns:
November 1995
There were two shutdowns in the fall and winter of 1995, one from November 14–19 and one from December 16, 1995, to January 6, 1996. Congress and the president at the time couldn’t agree on funding in areas like education for the coming year. There were around 800,000 employees furloughed because of the shutdown.
October 2013
The U.S. government saw a sixteen-day shutdown in October 2013 because the funding legislation had not been enacted, and there was no continuing resolution to buy more time. Around 800,000 employees were furloughed, and over a million were forced to work with delayed pay.
December 2018
A partial shutdown occurred in 2018 when the government had not yet enacted all 12 bills for the new fiscal year and the president could not come to an agreement with Congress. It was the most extended government shutdown in U.S. history, lasting 34 days and bleeding well into 2019. This shutdown impacted over 800,000 workers, many of whom were furloughed or still had to work with delayed pay.
These cases show that hundreds of thousands, and sometimes even millions, of government workers are impacted by government closures, not to mention all the people who don’t have access to certain government services and benefits. Find out if you can get relief for your small business with the ERTC by talking to a tax professional.
7 Implications for Businesses in a Government Shutdown
Small businesses rely on a steady stream of income, but they may also depend on funding from the government. Both of these forms of revenue can be negatively impacted when the government shuts down. Let’s take a look at seven of the most significant implications for businesses in the event of a shutdown:
1. Delays in Loan Application Processing
The Small Business Administration (SBA) typically pauses the processing of small business loan applications for its key lending programs when the government shuts down. Furloughed employees aren’t able to review and approve the applications.
2. Slowdown of IRS Tax Services
Taxes still have to be paid if the government shuts down, but the IRS will experience delays in communicating with taxpayers, processing amended tax returns, distributing cash refunds, and conducting audits.
3. Delays in the Hiring Process
A critical part of the hiring process is verifying that candidates are legally permitted to work in the United States Employers use the online system E-Verify to determine eligibility, and that federal system doesn’t operate when the government is shut down. So, the hiring process will also experience delays and holdups.
4. Pauses on Government Contracts
Government contracts for things like benefits and grants may also take a hit in the event of a shutdown. This means small businesses may not get funding on time from these contracts. Many businesses depend on government funding to stay afloat, so this can be a significant, potentially debilitating loss.
5. Ceasing Business Operations
Many businesses had to shut down because of a government order during the pandemic in 2020 and 2021. The government issued stay-at-home orders so no one would be going out and doing their everyday activities, but it also ordered non-essential businesses to shut down completely during that time. Some jobs can be done remotely, but for industries such as hospitality, travel, and entertainment, a government shutdown means they can’t conduct any business.
6. Loss of Revenue
Businesses quickly lose money when they can’t serve their customers. They may continue to lose a significant amount of revenue, depending on how long government shutdowns or restrictions are in place. This loss of revenue may come from not being able to serve federal employees, such as at a café near a government agency, or from being forced to close for a period of time, as with the pandemic restrictions. One study found that in April 2020, small business revenues fell by 22% across the country, equaling $4.6 billion just for one month.
7. No Occupational Health and Safety Administration Inspections
The Occupational Health and Safety Administration (OSHA) conducts workplace inspections regarding injuries or deaths that happen in the workplace. These inspections stop during a shutdown, though some states do have regulations in place for education and local government entities that would allow inspections to continue during a federal shutdown.
There are many potential negative impacts of a government shutdown, especially for small businesses. Many organizations have struggled during extended or complete shutdowns, as well as during the restrictions placed on the nation during COVID-19. Talk to a tax credit expert to learn how you can still get relief.
Why Talk to an ERTC Expert?
Business owners need all the help they can get during times of economic uncertainty, which can include government shutdowns and restrictions. Because of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Consolidated Appropriations Act, and other legislation passed during the pandemic, businesses and individual taxpayers have been able to take advantage of tax benefits and funding programs for extra support.
The ERTC is one such tax break. It was first introduced under the CARES Act in March 2020 and is the most extensive government stimulus program in U.S. history. Eligible businesses can get a credit of up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021.
Qualifying businesses either had to shut down because of government orders or had a loss in gross receipts of 50% for 2020 quarters and 20% for 2021 quarters compared to the same quarter’s gross receipts in 2019.
This fully refundable credit is 50% of up to $10,000 in wages paid to each employee per year for 2020 and 70% of up to $10,000 paid per employee per quarter in 2021. The credit ended on September 30, 2021, but if you’re eligible, you can still amend your tax return and claim the credit. You have three years from the date you submitted the tax return or two years from when you paid the tax, whichever is later.
Get started by talking to an expert at ERC Today. We help you understand eligibility requirements, how to claim the credit, and how to apply easily online.
Contact ERC Today for more information about your employee retention credit options. You can start your ERTC application online now.
