Don’t Get Caught in the Supply Chain Disruption ERTC Trap
In the constant barrage of solicitations encouraging organizations to apply for the Employee Retention Tax Credit (ERTC), many providers are claiming that “supply chain disruption” is a qualifying event for the ERTC.
In most cases, it’s simply not true.
We’ve seen this invalid position taken over and over again with many organizations we’ve talked with about the ERTC, and it’s a key claim for the rampant ERTC mills that have popped up all over the business landscape.
Companies or non-profits that file under the supply chain disruption factor may be at high risk for audit – and for having to give the money back if the supply chain disruption doesn’t apply. The IRS Chief Counsel just issued a memorandum on this often-cited and broadly interpreted claim. (It’s a good read, with examples of organizations that do and do not qualify under the “supply chain disruption” factor.)
“Supply chain disruption” is very narrowly defined, and only certain factors will allow an organization to qualify under it. An organization’s supplier must have had a full or partial suspension of its operations due to a government order, and the required items could not be sourced by a different supplier.
Additionally, increased costs or delays don’t matter, and do not provide a way to qualify for the ERTC.
Two ways to qualify for the ERTC
There are two bright-line tests that will enable an organization to qualify for the ERTC. First, a full or partial shutdown of operations in a calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. Second, the gross receipts test: If your gross receipts are less than 50% of your gross receipts in 2020 compared to the same calendar quarter in 2019, then your organization would qualify for that quarter. For 2021, the decline percentage drops to 20% compared to the same calendar quarter in 2019.
What to look for
There are mitigating circumstances, but with the IRS on high alert for fraud with the ERTC, it’s important to work with an established, experienced provider who can provide the best advice for your circumstances, and provide valid documentation for defense in the event of audit.
If you’d like to know more, here’s a 21-minute master class on the ERTC, which covers key pitfalls and watch-outs; we’ve also got a shorter video on how to make the most of the ERTC. You may also want to explore our library of COVID-19 resources or take the ERTC QuickTest to see if your organization may legitimately qualify. And if you’ve got questions or would like to set up a conversation with one of our top ERTC pros, contact us. As always, we’re here to help.