Supply Chain Disruptions – The Impact on ERC Eligibility

The Internal Revenue Service (“IRS”) has recently updated its guidance regarding which employers are considered eligible to receive the Employee Retention Credit (“ERC”), specifically regarding employers pursuing the credit as a result of supply chain disruptions.

Eligibility Based on Supply Chain Disruptions

In general, previous IRS guidance stated that an employer may pursue the ERC if they experienced a full or partial suspension of operations due to disruptions in their suppliers’ operations. Recent IRS guidance further states that using supplier disruption as the basis for the ERC is a “narrow, limited exception” – applicable to employers that fully or partially suspended their business operations because suppliers who provided critical goods or materials to the employer were themselves fully or partially suspended due to governmental orders.

If the supplier’s full or partial suspension prevented the supplier from delivering critical goods or materials to the employer, and the resulting disruption to the employer’s business rises to the level of a full or partial suspension of operations, the employer may be eligible for the ERC based on supply chain disruptions. In relying upon such disruptions, the IRS directs the employer to substantiate its eligibility through proper and adequate documentation of numerous factors, including governmental orders that the supplier was subject to.

Additional key takeaways from the updated IRS guidance include:

The applicable governmental order must be the cause, not simply a contributing factor, to the full or partial suspension of the supplier’s operations;
A delay in the receipt of goods or a shortage of goods may not rise to the level of a full or partial suspension of operations (for example, stating that necessary goods were stuck in the ports is, by itself, potentially an insufficient basis for pursuing the ERC as a result of supply chain disruptions); and
Significantly increased costs to obtain the same goods or materials from an alternative supplier may not be sufficient to establish a full or partial suspension of operations. In short, were there other alternatives to obtain the same goods?

Determining Your Eligibility

Determining your eligibility for ERC requires highly nuanced and detailed analysis. Filing an improper ERC claim could require the employer to pay back the credit, and subject the employer to additional penalties and interest. Dvorak Law Group and its team of experienced professionals are available to review your documentation and applicable governmental orders and provide our analysis of your potential eligibility.

Dave Mayer