ERC Tax Credit Eligibility: IRS Guidance for Supply Chain Disruptions

The COVID-19 pandemic has disrupted businesses worldwide, leading to economic challenges and uncertainty. To support employers, the government introduced the Employee Retention Credit (ERC), offering a credit against applicable employment taxes to eligible businesses. However, determining eligibility for the ERC can be complex, especially when it comes to supply chain disruptions. In this article, we'll explore recent guidance from the IRS on claiming the ERC under supply chain disruptions and clarify eligibility criteria based on the Generic Legal Advice Memorandum (GLAM) AM 2023-005.

ERC Tax Credit Eligibility and Supply Chain Disruptions

To claim the ERC, an employer must demonstrate a full or partial suspension of their trade or business during an applicable calendar quarter due to government orders restricting commerce, travel, or group meetings because of COVID-19. While the statutory language doesn't explicitly include supply chain disruptions, the IRS allowed certain employers to claim the ERC if they had to suspend operations due to their suppliers' business suspension.

The following are examples included within the IRS GLAM that discuss whether an employer's business operations are suspended because their suppliers are unable to make deliveries of critical goods or materials due to the supplier’s suspension.

ERC Tax Credit Supply Chain Disruption Scenario 1: Employer A

Employer A experienced delays in receiving critical goods from Supplier 1 during 2020 and 2021. While they assumed the delays were due to COVID-19, Supplier 1 never provided any documentation confirming a suspension. Moreover, Employer A continued to operate because they had a reserve of critical goods, showing that they weren't subject to a full or partial suspension.

ERC Tax Credit Supply Chain Disruption Scenario 2: Employer B

Employer B faced a bottleneck at the port, causing delays in receiving critical goods from Supplier 2. While some news sources mentioned COVID-19 as a contributing factor, Employer B couldn't identify a specific government order causing the bottleneck. Additionally, they didn't demonstrate that the bottleneck caused a suspension of Supplier 2's business, nor did they prove their inability to find an alternate supplier.

ERC Tax Credit Supply Chain Disruption Scenario 3: Employer C

Employer C and Supplier 3 were subject to a government order suspending their business operations in April 2020. However, after the order was lifted in May 2020, Employer C still experienced delays in receiving critical goods. Since they couldn't show a subsequent government order suspending Supplier 3, they were only eligible for the ERC in Q2 of 2020.

ERC Tax Credit Supply Chain Disruption Scenario 4: Employer D

Employer D faced difficulties in obtaining critical goods from Supplier 4 during 2020 and 2021. However, they managed to procure the goods from an alternate supplier at a higher cost. Employer D's ability to continue operations without suspension made them ineligible for the ERC.

ERC Tax Credit Supply Chain Disruption Scenario 5: Employer E

Employer E, a large retailer, experienced supply chain disruptions in 2021, resulting in the limited availability of certain products and raised prices for others. However, these disruptions did not force them to partially suspend their operations, and they continued to operate as a retail business.

Based on the recent guidance provided in the GLAM AM 2023-005, it's evident that supply chain disruptions alone do not meet the eligibility criteria for claiming the ERC. An employer must demonstrate that a government order directly suspended their critical goods or materials supplier's business, leading to their partial or full suspension. Additionally, employers must maintain appropriate records and documentation to substantiate their eligibility for the credit.

If you believe your business experienced a full or partial suspension due to a supply chain disruption, we encourage you to reach out to us. Our experienced tax credit team is ready to assess your situation, help you understand ERC tax credit eligibility requirements, and assist with any necessary amendments to your returns. Contact us today to discuss your specific circumstances and maximize your tax benefits during these challenging times. Email info@freedmaxick.com today.

Note: This article is for informational purposes only and should not be considered legal or tax advice. Employers seeking the ERC should consult with a qualified professional to assess their individual situation.