A range of financial and operational circumstances could qualify your business for the Employee Retention Tax Credit, but in recent months, the IRS has received more ERC claims related to supply chain disruptions occurring between 2020 and 2021 as a result of government orders during the COVID-19 pandemic.
Although thorough documentation is required to qualify for ERC based on supply chain disruption, some businesses qualify if a government order caused their supplier to partially or fully suspend operations anywhere between sourcing and destination points.
In this article, we’ll outline the necessary standards of proof for businesses wishing to verify their ERC eligibility based on supply chain disruption. We’ll also offer examples of domestic or foreign government orders that qualify as eligible disruptions.
Demonstrating Supply Chain Disruption
Claiming supply chain disruption based on national workforce shortages, increased raw material costs, or widescale economic challenges during the COVID-19 pandemic, is not sufficient to qualify an entity for ERC.
Employers that wish to demonstrate how a government order affected its supplier (and thus led to partial or full suspension of operations) should ensure the following facts are verifiable:
- A domestic or foreign government order impacted the supplier’s capacity to deliver essential goods to the business
- A domestic or foreign government order impacted the business’ ability to purchase essential goods from an alternative supplier
- The business/employer suffered demonstrable operational consequences as a result of its inability to acquire essential goods
In general, employers should aim to identify a specific government order (or orders) that affected its supplier’s capacity to supply essential goods. Employers can reference federal, state, local, or (in some cases) foreign orders that placed limitations on essential and even some “non-essential” supply chain operations.
IRS guidelines for ERC eligibility based on supply chain disruption require that the following information be documented:
- Citation of the government order(s) that created a disruption or partial shutdown for the supplier
- The name and location of the employer’s supplier
- The duration of the supply chain disruption
- Documented evidence that alternative suppliers were unavailable or unable to provide the employer with essential operational goods
- A thorough account of how the supply disruption impacted the eligible employer
As you prepare information for your own business’ ERC claim, bear in mind that employers can demonstrate disruption at one or multiple stages of the supply chain. Whether a government order affected your business’ supplier at a sourcing point, storage point, transfer point, destination point, or at any part in the transportation process, your business may still qualify for ERC.
Examples of Qualifying Government Orders and Circumstances
Question 12 within the IRS’ Notice 21-20 articulates one hypothetical scenario in which an employer would qualify for ERC based on supply chain disruption. Using an auto parts manufacturer as an example, the hypothetical employer qualifies because its “supplier of raw materials [was] required to […] suspend operations due to a government order,” impacting the employer’s ability to perform operations during a given period. Additionally, proof of the employer’s inability to procure necessary raw materials from an alternative supplier is present.
Even with this provided example as guidance, many employers still have lingering questions about which specific orders could qualify and support an ERC claim based on supply chain disruption. Below are just a few examples that could be cited for use in a successful ERC claim:
Los Angeles and Long Beach Port Disruptions
Between 2020 and 2021, congestion and crew issues at the port in Los Angeles and Long Beach created significant supply chain delays for many American businesses. Simultaneously, local orders and mandates in Los Angeles County further impacted the port’s workforce availability and efficiency due to public health requirements. These issues were further compounded by an outbreak of COVID-19 among port workers and subsequent workforce shortages due to self-quarantine requirements in the first and second quarter of 2021.
Shutdowns and Limitations to Mexican Manufacturing
Beginning in March 2020, the Mexican government suspended all manufacturing operations, except those related to transportation, healthcare, or maquiladora operations. Maquiladoras (U.S.-owned companies operating in Mexican states) were obligated to abide by the same government restrictions imposed on domestic transportation and healthcare manufacturers. These heightened restrictions and safety guidelines, which at times led to partial or full shutdowns of facilities by the Mexican government, led to significant delays for certain US-based companies relying on essential goods from this region.
Port Closures in Japan, India, and China
Particularly throughout the second and third quarters of 2021, many container ships with final destinations in North America were stopped or delayed in intermediary ports in Asia, causing major supply chain disruptions.
Whether a result of COVID-19 testing requirements, new crew scheduling requirements, halts to incoming or outgoing vessels, or changes to safety and health regulations, many employers in the United States were impacted by these supply chain disruptions. In China, some full port closures lasted for (or over) a calendar month, such as in Yantian Port and Shanghai.
European Business and Employee Travel Restrictions
Throughout 2020 and 2021, a host of restrictions and safety guidelines either delayed business/employee travel or outright barred business travelers from entering Italy or the Netherlands. Additionally, in some cases, business travelers were forced to quarantine and undergo health surveillance within these countries if they transited through any non-EU countries before arriving in their intended EU destination. On a broader scale, the Italian Government’s State of Emergency declaration severely limited or barred movement, travel or entry within Italy throughout 2020 and 2021, including for business travelers.
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Although gathering and organizing all of the information necessary to submit an ERC claim can feel daunting, with professional support, this process can help your organization access the funds it deserves to strengthen business operations now and in the future.
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