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If you’re a business owner, you likely faced some kind of supply chain disruption over the past few years, due to the COVID-19 pandemic. So, what did that look like?
Maybe you had a hard time receiving goods to sell to your customers … or you had a hard time finding suppliers to get you those goods. Perhaps you experienced delays in receiving critical products or services.
Essentially, any event that causes a disruption in the production, sale, or distribution of products may be deemed a “supply chain disruption.” Whether that disruption was detrimental to your bottom line or not, it could possibly allow you to qualify for a tax refund.
This refund is available through the Employee Retention Credit (ERC), a payroll tax refund that helps eligible businesses receive a significant credit per employee they kept on payroll during the pandemic.
The Employee Retention Credit was developed to encourage and support employers who retained existing employees throughout 2020 and for the first three quarters of 2021 by offering a generous payroll tax refund through the IRS.
Keep reading to discover how the Employee Retention Credit can help eligible businesses thrive in times of adversity – as well as how Innovation Refunds can help qualifying businesses originate their tax credit application and get the refund they deserve.
Government Shutdown and the ERC Suspension Test
There are multiple ways to qualify for the Employee Retention Credit. The most notable way is to have experienced a decline in gross receipts, typically more than a 20% decline during the 1st, 2nd, or 3rd quarters in 2021. This was put into motion by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which established the ERC on March 27, right as business owners were suffering the most.
However, even if you did not have a revenue decline in 2020 and 2021, you may still qualify for the ERC if your business faced a partial or full suspension of operations due to governmental orders (local, state, or federal).
How does the IRS establish this? Mainly through the Full or Partial Suspension test. Nearly any limitation on the ability to perform or render services at capacity could be considered a partial shutdown and could help you qualify for the ERC.
Examples of government orders that qualify for the ERC
Which government orders would likely qualify you for the ERC?
In general, you need to have experienced a government order that impacted your operations in terms of either service capacity or hours. More specifically, it needs to have been forced to restrict access to its location or forced to reduce the level of operations, compared to its level of operations in 2019.
To qualify for the ERC via shutdown test, the IRS also wants to prove your business was affected by more than 10%
- If your business was essential, but supply issues impacted operations, you may qualify for the ERC.
- If your business received a direct order to fully suspend, you may qualify for ERC.
- If your business was deemed essential, but limited in service capacity or hours, you may qualify for ERC
These are all highly-nuanced scenarios with complex calculations, which is where a qualified ERC company like Innovation Refunds’ team of independent tax professionals can help.
Examples of government orders that do not qualify for the ERC
Which government orders would not likely qualify you for the ERC?
- An employer subject to a government order, who can maintain “comparable” operations through telework or other means will likely not be eligible for the ERC through the suspension test
- Your business operated in multiple jurisdictions, with varying degrees of shutdowns based on location. This would still be a partial shutdown, but some places may have had stricter shutdown orders than others
- CDC recommendations alone are generally not considered governmental orders
In addition to these scenarios, if you received a PPP loan, you could still be eligible for the Employee Retention Credit. That said, only qualified wages that are not counted as payroll costs when obtaining PPP loan forgiveness will count toward eligibility for ERC.
What qualifies as an ERC supply chain disruption?
So, do you think you’ve experienced a supply chain disruption? You may be right, but you will need to prove it to get a refund. The IRS not only requires businesses to identify the supply chain disruption they faced, but to also provide specific documentation to support it, such as:
- Supplier name
- Supplier location
- Government orders that affected the supplier (full or partial shutdown)
- Duration of disruption
- Proof that other suppliers could not support your orders
Examples of supply chain disruptions
Let’s take a look at how supply chain disruptions could enable a business like yours to qualify– and how Innovation Refunds helped a few businesses get the refunds they deserved.
- At Little Knights Daycare in Godfrey, Illinois, we helped owner Shannon Knight claim her refund in part by proving that her business was under direct government shutdown for more than 10 weeks. Shannon plans to use the ERC money to give her staff a raise and help offset parents’ costs. Now that’s a win-win.
- At Carolina Sports in Camden, South Carolina, a high school sports photography business, we helped owner Mark Houde claim his refund in part by proving that his business was affected directly by the government shutdown of schools. He’s using his ERC refund to bolster resources for his valued staff.
Supply chain disruption criteria
So, what does the IRS have to say about the criteria for supply chain disruption? They’ve outlined four distinct criteria for determining whether or not your business was affected by it.
- The supplier your business works with was unable to deliver essential goods or materials due to governmental orders.
- Your business could not source essential goods or materials from another supplier within the same budget.
- The goods or materials that were unavailable were essential to operate your business.
- Because of the supply chain issue, your business was forced to limit certain operations that caused a nominal impact on the business.
The IRS released an update to ERC supply chain disruption qualifications on July 21, 2023:
As of July 21, 2023, the IRS has released an update to their previously established ERC supply chain disruption guidelines. The memo is described as “a commentary” discussing the limitations of ERC eligibility and should be read for further understanding of the shutdown tests and supply chain disruptions.
Your biggest takeaway? The agency will be scrutinizing supply chain-based justifications for claiming the ERC. It also emphasizes the necessity of documenting the specific governmental orders which you relied upon and demonstrating how these orders created challenges for the supplier.
An example in the IRS’ own words:
Employer A operates an auto parts manufacturing business. Employer A’s supplier of raw materials is required to fully suspend its operations due to a governmental order. Employer A is unable to procure these raw materials from an alternate supplier. As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations for a period of time. Under these facts and circumstances, Employer A would be considered an eligible employer during this period because its operations have been suspended due to the governmental order that suspended the operations of its supplier.
Innovation Refunds can help determine ERC eligibility due to supply chain disruptions
Did more than just general supply chain issues affect your business during COVID? We can help determine if your business qualifies for the Employee Retention Credit (ERC) under limited commerce. Our team of independent tax attorneys and professionals are well-versed in identifying eligibility criteria and can guide you through the process, providing you with support and peace of mind when filing for the ERC.
*Innovation Refunds works with a team of independent tax professionals. We will share your information with these professionals to evaluate and process your claims. Innovation Refunds does not provide tax or legal advice. Terms & conditions apply.