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Clarifying ERC Eligibility Amid Supply Chain Disruptions

August 23, 2023

Written by Complete Payroll

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COVID-19 was a challenging time for businesses, with supply chain issues and uncertainties. Now, the IRS Chief Counsel has provided clear guidelines to help you determine whether or not you qualify for the Employee Retention Credit (ERC) based on the government's orders impacting your suppliers.

Employee Retention Credit

As an employer, you must prove that your business's operation was fully or partially suspended during a specific calendar quarter due to government orders that limited commerce, travel, or group meetings. You can also claim this credit if you had to suspend your business operations due to critical goods or material suppliers being suspended due to COVID-19.

For an employer to be considered for this tax exemption, here are a few examples given by the IRS Chief Counsel;

Must Be Able to Prove Your Supplier's Business was Suspended 

To be eligible for ERC, you must be able to show that a government order fully or partially suspended your supplier's business. For example, if you experienced delays receiving critical goods from your supplier, but this was not due to a government order suspending their business, you cannot claim the Employee Retention Credit.

You may assume the supplier delays were COVID-19 related, but if the supplier never provided you with an order stating it was as a result of a government order, and you continued to operate normally despite the disrupted supply chain, then you are not eligible. 

Must Prove Your Supplies Weren't Just Stuck in Port

Perhaps your supplier's business wasn't affected by a government order, but critical supplier goods were stuck in port. While COVID-19 may be believed to have been the source of the bottleneck at the port, as an employer, you must have a specific order from your supplier stating that this is a substantial contributing factor. 

In addition, even if you have an order from your supplier stating that this bottleneck was COVID-19 related, you will also have to prove that you couldn't find an alternative supplier

Must Prove Your Supplier's Business Was Affected By COVID-19

If you, as an employer, were affected by a government order suspending your and your supplier's business operations in April 2020, then you could qualify for the ERC in Q2 of that year. 

However, you would not be eligible for the Employee Retention Credit in subsequent quarters because the suspension order was lifted in May 2020 if you cannot show a later government order that affected your supplier's business operation.

Remember that your supplier will still have to provide you with a specific reason for the delay, proving that it was caused by the government's order in April 2020.

You Won't Be Eligible for the ERC if You Never Shut Down

In order to be eligible for the Employee Retention Credit, your business must have closed due to COVID-19. Perhaps you couldn't obtain your goods from your primary supplier, but if you were to obtain your critical goods from an alternative supplier, you wouldn't be eligible even if it was at a higher price. 

So even if you had a higher cost of goods due to the disrupted supply chain but didn't have to suspend business operations, you will not be eligible for the ERC.

Must Be Able to Prove You Couldn't Find an Alternative Supplier

Finally, you have to show that a government order suspended your critical goods supplier, and you could not obtain those critical goods from an alternative supplier, forcing you to shut down. 

Another situation would be if you weren't affected by government suspension orders but still suffered from various supply chain disruptions and had to raise prices due to limited stock. However, you would not comply with the Employee Retention Credit since you could still operate as a business despite these 2021 disruptions.

Trust Complete Payroll for Your ERC Filing Needs

While many businesses qualify for this beneficial credit, some have unfortunately fallen prey to opportunistic sharks seeking to exploit the situation.

At Complete Payroll, we stand against these unjust practices and want to ensure that no business suffers from misleading services or exorbitant fees. We aim to help you navigate the ERC claim process with transparency, integrity, and genuine support.

If you want to know more about our ERC Filing Service or need help calculating if you're eligible, check out our ERC Page for more information.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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