The ERC program is designed for employers who have experienced disruption due to the COVID-19 pandemic. The credit provides up to $26,000 per employee in total for wages paid in 2020 and 2021, subject to certain requirements, including a significant decline in gross receipts or a full or partial suspension of its business operations. Taxpayers should be aware that the IRS will scrutinize all claims for this credit; therefore, broad assertions of supply chain disruption may not always qualify.
Under Rule 12 of IRS Notice 2021-20, businesses may be able to claim the Employee Retention Credit (ERC) even if their gross receipts have increased. This is as long as their operations are positively impacted by governmental orders that require suppliers to suspend operations. However, it is important to note that merely experiencing issues in the broader supply chain does not qualify a business for the ERC.
Supply Chain Disruption
As an employer considering a full or partial suspension of operations, it's important to review all relevant facts and circumstances that apply. This includes the supplier’s ability to deliver necessary goods despite governmental orders, the employer’s capacity to purchase what is needed from another supplier, and the economic impact of an inability to acquire required items. All three components must be present in order for an employer to make a claim.
When assessing what qualifies as a relevant governmental order, employers should consider any Federal, State, or local restriction imposed in direct response to the COVID-19 pandemic which impacts commerce and business activity. This can include proclamations that limit travel or group meetings and the functioning of suppliers.
Governmental orders that declare certain non-essential businesses must cease operations for a predetermined length of time can qualify as a full or partial suspension of work, if those businesses are considered non-essential. However, the rules governing the Employee Retention Credit (ERC) do not take into account non-enforceable recommendations, demand and supply issues, or enforceable mask requirements.Similarly, supply chain disruptions due to employee shortages, heightened demand for resources, foreign governmental orders, or broad economic factors also should not be included as considerations when determining eligibility for the ERC.
It's important to note that the definition of qualifying wages for a partial or full suspension of operations under the ERC depends on when a government order is in effect. The regulations specify that, for an employer to qualify for the quarter in question, only wages paid during the period where such governmental order is in operation are included. Consequently, having temporary suspensions at the beginning of the pandemic would not necessarily make businesses eligible for later quarters of potential refunds and will thus limit how much qualified wages they can receive.
Need Help Determining Eligibility?
Employers utilizing the Employee Retention Credit (ERC) face potentially significant penalties if their claims are incorrect. The IRS has recently announced plans to hire more than 10,000 auditors, emphasizing that ERC claims will be under increased scrutiny. As such, seeking guidance from a knowledgeable ERC specialist is recommended for taxpayers who wish to remain compliant with the IRS and avoid incurring steep fines.