A recent wave of third-party marketing messages is creating some confusion about Employee Retention Credit (ERC) tax claim eligibility. Service vendors may publish ads promising lucrative windfalls from unclaimed ERC refunds related to supply chain disruptions. To help sort fact from fiction, we prepared this informal ERC update for our client and partner community.
While it is true that the IRS code under the CARES Act allows tax relief for certain COVID-19 related business disruptions, claims must pass a strict eligibility test. Not all supply chain issues automatically fit IRS eligibility criteria, and companies who want you to sign up for their services may leave out key details. If you would like more context and clarity regarding ERC eligibility, here are some key points to consider.
That advertisement or search result may not tell the whole ERC story
What many popular headlines on this topic overlook (or omit) is that the central question about ERC eligibility has two equally important parts.
- Did your business experience a full or partial suspension in 2020 or 2021?
- Was that suspension the result of an order from a government authority limiting commerce, travel, or group meetings because of COVID-19 health concerns?
For the purposes of the CARES Act and the Employee Retention Credit, the IRS is looking for a set of carefully defined conditions directly linked to public health orders arising from the COVID-19 pandemic.
Without addressing all the relevant ERC details in the IRS code or CARES Act language, there is a critical distinction to remember. Supply chain issues by themselves do not make an employer eligible for this narrow form of refundable tax relief. Eligibility is determined by specific (and documented) conditions of full or partial business suspension.
Busting myths about supply chain woes and ERC eligibility
Supply chain problems were in the news during and after the pandemic and had a variety of far-reaching impacts on both employers and consumers. The IRS recently issued guidance providing the following examples of disruption scenarios where employers would NOT be ERC eligible:
- A supplier reduced or stopped shipments due to trucking or dock labor shortages
- A supplier paused operations under a COVID-19 related government health order, but the employer was able to find an alternate source for the critical good or service
- A supplier paused operations under a COVID-19 related government health order, but the employer was able to continue operations with supplies on hand
- An alternate supplier charged more for essential goods or services, reducing profit
- An employer cannot demonstrate that a specific government order caused a supply chain bottleneck that directly resulted in full or partial business suspension
Continue the Conversation
This is an informal summary to give you a general frame of reference on ERC eligibility. Always talk with a qualified tax expert about your specific business situation before making any tax credit decisions and make sure that these choices are part of a coordinated strategy. Please reach out if you would like to explore this topic in more detail.