IRS Issues Guidance on Supply Chain Disruption as Qualification for Employee Retention Credit

Employee retention credit (ERC) eligibility has been a hot topic for business owners recently as companies look to recoup losses suffered during COVID-19, especially those who had to fully or partially suspend operations. The ERC has been modified since it was first passed, and it has caused a lot of confusion and controversy for the IRS and business owners.

Three years after the credit was first introduced, “ERC specialists” have been urging business owners to enlist their help in applying for the ERC, promising a substantial return on a “lucrative tax credit opportunity.”  These businesses have been advising their clients that supply chain disruptions qualify a business for the employee retention credit, which is not entirely true.

What qualifies and what does not?  

A recently released IRS memo details different fact patterns relating the qualification to claim the ERC based on supply chain disruptions. The result of the majority of scenarios was that the claimed supply chain disruptions for a full or partial shutdown of their business did not qualify the employer for the ERC.

While an employer may qualify for the ERC based on supply chain disruptions, it is a very limited exception that carries additional specifications as it applies to supply chain disruptions. The “supply chain exception” applies only to employers that had to “fully or partially suspend their business operations because the employers’ suppliers who provided critical goods or materials to the employer were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority.”

Business owners that are considering an ERC claim based on supply chain disruptions need to review the facts to make sure they meet the requirements detailed by the IRS. A few details to keep in mind:

• The supplier’s operations must have been fully or partially suspended under an order from an appropriate governmental authority, and they must be able to show proof of that order.
• Without being tied to a specific government order, supply chain issues such as driver shortages, port bottlenecks, or illness-related staffing shortages do not qualify as a supply chain disruption for the ERC.
• Rising supply costs do not qualify as a supply chain disruption for the ERC.
• Limited product availability resulting in decreased profitability does not by itself qualify as a supply chain disruption for the ERC.

Business owners that have claimed for credits using the supply chain disruption should review the newly issued guidance and assess its impact on previously filed claims.