Impacted by supply chain disruptions? IRS Clarifies ERC Eligibility

The IRS continues to warn taxpayers to use caution when approached by vendors saying the employee retention credit (ERC) is “easy money” and “everyone is entitled to the claim.” 

New guidance released in July — the Generic Legal Advice Memorandum (GLAM) — specifically examines 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 ERC.

The new guidance emphasizes what does not qualify an employer. For example: 

• Vague confirmations from suppliers about “COVID delays” are NOT sufficient. To qualify under a supplier shutdown the employer must demonstrate: (1) a governmental COVID order suspended the supplier’s operations; (2) this lack of goods/materials caused the employer’s business operations to be suspended; and (3) the employer was not able to obtain the goods/materials from an alternate supplier.
• Generic statements about bottlenecks at ports or truck driver shortages are 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.

Proper documentation and caution when approached by vendors claiming eligibility for the credit is critical. Vendors may not always properly factor eligibility, which is a huge clue that the IRS may look at ERC in their audits if not properly documented.

Full text of the GLAM can be found on the IRS website.

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 — please contact your tax advisor. CLA can help.

For more information on ERC guidance in Iowa, contact Justin Zimmerman at justin.zimmerman@claconnect.com or 319-558-0265.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com.

CLA exists to create opportunities for our clients, our people, and our communities through our industry-focused wealth advisory, digital, audit, tax, consulting, and outsourcing services. CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.