Employee Retention Credit FAQs Updated to Address Supply Chain Issues

Cross References

IRS.gov The Employee Retention Credit (ERC) is a tax credit for employers who suffered economic losses during the COVID pandemic. Employers could claim the credit for qualified wages paid between March 13, 2020, and December 31, 2021 if the employer:

Sustained a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,

Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or

Qualified as a recovery startup business for the third or fourth quarters of 2021. A taxpayer does not qualify for the ERC if he/she/it did not operate a business or tax-­ exempt organization with employees.

The IRS has reported scams concerning the ERC in which scammers promise big money to taxpayers by claiming the credit. The scammers charge a fee to help the taxpayer claim the credit, and the taxpayer is on the hook to pay it back plus interest and penalties when the IRS determines they do not qualify.

To help taxpayers determine whether they qualify for the ERC, the IRS has set up a Frequently Asked Questions (FAQs) on their website outlining the qualifications for claiming the credit. One set of qualifications is for a business that sustained a full or partial suspension of operations due to an order from a governmental authority. The IRS updated these FAQs on July 28, 2023 to read as follows.

Q1. What kind of government orders qualify my business or organization for the ERC? A1. To qualify for ERC, you need to have been subject to a qualifying government order related to COVID-19 that caused a full or partial suspension of your trade or business operations. The government order may be at the local, state or federal level. Examples of governmental orders:

An order from the city’s mayor stating that all non-essential businesses must close for a specified time period,

A state’s emergency proclamation that residents must shelter in place for a specified period, except for essential workers,

An order from a local official imposing a curfew on residents that impacts the operating hours of your trade or business for a specified time period,

Employee Retention Credit FAQs Updated to Address Supply Chain Issues continued

An order from a local health department mandating a workplace closure for cleaning and disinfecting.

Q2. Can I rely on a recommendation, bulletin or statement issued by a government authority to qualify for ERC? A2. No. To qualify for the ERC, you must have been subject to a government order that fully or partially suspended your trade or business.

Recommendations or statements encouraging you to take certain actions are not orders. If you use a third party to calculate or claim your ERC, you should ask them to give you a copy of the government orders – not a generic narrative about an order. Read the order carefully and make sure it applied to your business or organization.

Q3. Is being subject to a government order enough to make me eligible for ERC? A3. No. You need to demonstrate that the government order was related to COVID-19 and that it resulted in your trade or business being fully or partially suspended. Q4. What does it mean to be fully or partially suspended?

A4. Whether your business or organization was fully or partially suspended depends on your specific situation. For examples, see Notice 2021-20, Part III, Section D. Some examples of who doesn’t qualify under this eligibility factor:

If all your employees were able to telework during the pandemic and your business continued to operate, your business wasn’t suspended.

If your customers were affected by a stay-at-home order, but no orders applied to your business operations, you weren’t suspended.

If you voluntarily closed your business or reduced hours of operation, you weren’t ordered to suspend.

You could still qualify for ERC based on a decline in gross receipts even if you don’t qualify under suspension of operations due to government order.

Q5. Was my business or organization fully or partially suspended if I had a supply chain issue?

A5. A supply chain issue, by itself, does not qualify you for the ERC.

The IRS provided a narrow, limited exception if an employer was not fully or partially suspended but their supplier was. However, it applied only when the employer absolutely could not operate without the supplier’s product and the supplier was fully or partially suspended themselves.

In addition to having the supplier’s governmental order, you will need to show that:

The government order caused the supplier to suspend operations,

You couldn’t obtain the supplier’s goods or materials elsewhere (regardless of cost), and

It caused a full or partial suspension of your business operations. You should be wary of anyone who says you qualify for ERC based on supply chain issues without asking for specific information about how your business or organization was affected, your supplier’s situation and documentation.