Supply chain disruption has caused significant impacts across the United States (and the world) over the past three years. These unfortunate delays have led to many taxpayers attempting to claim the Employee Retention Credit on the basis of supply chain disruption. To shed light on how supply chain problems could lead to eligibility for a business to claim the ERC (or maybe not at all), we will break down a recent IRS memo, released July 21, 2023.
The Big Question
The memo addresses a key concern: Can employers dealing with supply chain disruptions qualify for the Employee Retention Credit?
Breaking Down the Scenarios
The memo considers various scenarios to provide clarity:
Scenario 1: An employer faced delays due to COVID-19 affecting its supplier, but it continued operating. It does not meet the criteria because no official order suspended its business.
Scenario 2: An employer experienced goods stuck at a port, possibly due to COVID-19. However, without clear evidence of a related government order, it will not qualify.
Scenario 3: An employer and its supplier faced a suspension order in April 2020. Even though they had delays afterward, they only qualified for the second quarter of 2020 when the order was active.
Scenario 4: An employer continued operations despite not receiving goods from a supplier. Since it could still function, it does not fit the suspension criteria.
Scenario 5: An employer faced supply chain issues but could fully operate throughout 2021. The credit will not apply as the disruptions did not result in a business suspension.
In four out of the five scenarios present in the memo, the IRS concludes the employers are NOT eligible for the ERC, noting the following items are insufficient to substantiate qualification:
Vague confirmations from suppliers about “COVID delays”
Generic statements about bottlenecks at ports or truck driver shortages
Incurring higher costs for critical goods/materials
Not being able to stock or produce a few or limited number of products or having to increase prices
Supply Chain Disruptions vs. Official Orders
The law has never specifically mentioned supply chain problems as a qualifier for claiming the ERC. Yet a possibility for eligibility exists where official government orders fully or partially suspended a business' operations. Or, if a business’ supplier had their operations halted due to such an order that limited commerce, travel, or gathering related to COVID-19, the business might be considered partially suspended and thereby eligible.
To qualify under a supplier shutdown (and not a “supply chain” shutdown), an employer must demonstrate:
A governmental COVID order suspended the supplier’s operations, and
The lack of the goods/materials caused the employer’s business operations to be suspended, and
The employer was not able to obtain the goods/materials from an alternate supplier.
While supply chain disruptions have been incredibly challenging, they cannot - in and of themselves - be automatically used to create eligibility for capturing the Employee Retention Credit. It is the government orders that played a part in the disruption that are critical. In this nuanced space, every taxpayer’s facts and circumstances are different. We are glad to walk you through your specific situation to help you understand whether or not and to what extent you may be eligible for this lucrative tax credit.