NEW ERC Guidelines – Was Your Supply Chain Disrupted?

ERC continues to be a hot topic.  While most agribusiness was considered “essential” during COVID pandemic, some taxpayers have been able to qualify for the Employer Retention Credit based on the bright line test of a 50% or 20% reduction in revenue, depending on the tax year analyzed.  Others took an approach that relied on a more subjective test relating to suspension of their business due to supply chain disruption.  There was previously little guidance on what qualified as a supply chain disruption. The IRS released additional guidance this week on whether an Employer experienced a full or partial suspension of operation of a trade or business due to a supply chain disruption making them eligible to claim the Employee Retention Credit. Full text of the Generic Legal Advice Memorandum (GLAM) is provided here. Key points related outlined in the memorandum related to qualification criteria are as follows:

• Vague confirmations from suppliers about “COVID delays” is not sufficient.  To qualify under a supplier shutdown the employer must demonstrate: (1) a governmental COVID order suspended the supplier’s operations; (2) the lack of the goods/materials caused employer’s business operations to be suspended; and (3) employer was not able to obtain the goods/materials from an alternate supplier.
• Generic statements about bottlenecks at ports or truck driver shortages is not sufficient.
• Qualification under a supplier shutdown ends when the order is lifted.  Residual issues after the order ends do not qualify the employer.
• Incurring higher costs for critical goods/materials does not qualify an employer for the credit.
• Not being able to stock/produce a few or limited number of products and/or having to increase prices does not qualify an employer.

This guidance would primarily impact farm supply dealers and food processors.  In short, the GLAM reiterates our prior decision points as it relates to qualification. This is a huge clue that the IRS may look at this in their audits if not properly documented.

The bottom line

If you claimed a credit and now wonder if the credit is valid — or if you haven’t applied and wonder if you qualify for a credit — contact your tax advisor. The window on ERC has not yet closed.  Claims related to the 2020 tax year must be filed by April 2024 and claims related to 2021 have until April of 2025 to be submitted.