In a Generic Legal Advice Memo, IRS Chief Counsel discussed whether an employer experienced a full or partial suspension of their trade or business due to a supply chain disruption. The memo clarifies the guidance on when an employer suffered a suspension of business operations because of supply disruptions. (AM 2023-005, 7/21/2023)
Generally, to claim the employee retention credit (ERC) an employer must show that their business was fully or partially suspended during an applicable calendar quarter because of government orders limiting commerce, travel, or group meetings due to COVID-19.
The IRS, in Notice 2021-20, allowed certain employers to claim the ERC if they had to suspend their business operations because their critical goods or materials suppliers’ businesses were suspended by government order. This limited exception provides that “[a]n employer may be considered to have a full or partial suspension of operations due to a governmental order if, under the facts and circumstances, the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.” See IRS provides guidance for employers claiming the Employee Retention Credit for 2020 (3/4/2021).
In the memo, Chief Counsel discusses five examples of whether an employer’s business operations are suspended because their suppliers are unable to make deliveries of critical goods or materials due to the suppliers suspension.
In Example 1, Chief Counsel determined that Employer A wasn’t eligible to claim the ERC because they couldn’t show that a government order fully or partially suspended its supplier’s business. In this example, A was not subject to a government order suspending its business; however, they experienced delays receiving critical goods from their supplier. While A assumed that the delays were caused by COVID-19, the supplier never provided A with an order suspending its business and A couldn’t locate one. Moreover, A continued to operate despite the supply chain disruption because it had a supply of critical goods normally provided by that supplier.
In Example 2, Employer B also wasn’t eligible for the ERC because they couldn’t show that a government order suspended its supplier’s business. In this example, B was not subject to an order suspending its business, but critical goods from its supplier were stuck in port. B couldn’t identify a specific order limiting its supplier’s business or causing the bottleneck at the port. The only evidence B had that COVID-19 was responsible for the bottleneck at the port was some news sources. While COVID-19 may have been a contributing factor to the bottleneck, B didn’t show that a government order caused the bottleneck at the port. And, even if B could identify an order that caused the bottleneck, to qualify for the ERC B had to show that the bottleneck caused the suspension of their supplier’s business and they couldn’t find an alternate supplier.
In Example 3, Employer C was an eligible employer in Q2 of 2020 because a government order suspended both their and their supplier’s business operations in April 2020. However, C wasn’t an eligible employer for any subsequent calendar quarter because the government’s suspension order was lifted in May 2020, and C couldn’t show a later government order that suspended its supplier’s business operations. While C experienced delays receiving critical goods from its supplier, that supplier didn’t provide a reason for the delays; C just assumed the delays were caused by the government’s April 2020 order.
In Example 4, Employer D wasn’t eligible for the ERC because D never shut down its business. D was not subject to a government suspension order at any point during 2020 or 2021. While D could not obtain critical goods from its supplier, they were able to obtain the goods from an alternate supplier at a higher price. And, D’s higher cost for critical goods didn’t result in a suspension of their business operations.
Finally, Employer E isn’t eligible for the ERC during 2021 because they couldn’t show that a government order suspended their critical goods supplier, which in turn caused E to shut down because it couldn’t obtain those critical goods from an alternative supplier. E, a large retailer, wasn’t subject to any government suspension orders but suffered from various supply chain disruptions, wasn’t able to stock a limited number of products and was forced to raise prices on other products that were in limited supply. At no time did the product shortage prevent E from operating as a retail business during 2021. Since E was still able to offer a wide variety of products to its customers, they were not forced to partially suspend their operations due to supply chain disruptions.
For more information about the employee retention credit rules, see Checkpoint’s Federal Tax Coordinator ¶H-4687.5 et seq.
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