If government orders caused supply chain issues that had a more than nominal effect on business operations, you can this fully refundable credit. No significant decline in gross receipts is required to be eligible for the employee retention tax credit (ERTC) under this provision. just qualified wages paid to eligible employees and a government-mandated order that limited commerce.
How to Qualify
Employee Retention Tax Credits were introduced under the Coronavirus Aid Relief and Economic Security (CARES) Act and Congress further modified the qualification rules in the Taxpayer Certainty and Disaster Relief Act. An eligible employer with fully or partially suspended operations due to a governmental order may now be eligible for the ERTC.
Eligible employers must seek guidance through IRS Notice 2020-21 as to how certain full or partial shutdown orders affect claiming employee retention credits. Solid proof of how delayed shipments of critical goods transpired is required to make a claim.
The ERC government order test has very different qualification rules than the gross receipts test. Rather than demonstrating a significant decline in gross receipts of 20%-50%, indisputable proof is required to claim a government mandate caused supply chain disruptions that negatively affected an employer’s business operations.
Restrictions that affected supply chains must have also directly impacted the employer’s ability to deliver critical goods. Any order, proclamation, or decree from an appropriate governmental authority, such as the Federal government or any state or local government can be used. Employee Retention Credit (ERC) claims based on the government suspension test may also need to clearly state how it limited commerce, travel, or group meetings, and the nominal effect this had on a business’s operations.
When determining eligibility and an employer’s ability to qualify for the ERC based on supply chain disruption issues, some of the following criteria must be met.
- A state or local government order that required a partial or full shutdown affected a business’s ability to make or receive deliveries of critical goods or materials.
- Normal business operations were affected by an inability to purchase critical goods or materials, and they could not be procured from an affordable alternate supplier.
- A supply chain interruption that required suspension of an employer’s operations must have affected more than a nominal portion in terms of lost revenue or service hours performed.
How to Claim
Employers can file for employee retention credits if they can prove their gross revenue losses happened because they experienced supply chain disruptions. You may also make ERC credit claims if you can prove that a government shutdown order caused a supplier’s operations interruption, and directly impacted your business.
You will need to provide extensive documentation of how a full or partial government shutdown order affected your trade or business, and can only claim for the period the order spanned.
Supporting documents for US suppliers will need to cover how your business suffered with suspended shipments or lost production due to a US Governmental order affecting normal trade or business. When claiming disruptions with foreign suppliers, delays in critical shipments must be focused on US ports only and how a US government shutdown affected their ability to adhere to a normal delivery schedule.
Another way to be eligible for the ERC is to prove a government-mandated order affected a nominal portion of the business. A quantifiable loss of revenue must pass one of two tests in comparison to the same calendar quarter of 2019.
- 10% loss in gross revenues
- 10% loss in hours of service performed
You can show how the flow of parts and materials affected each plant’s location by creating a supplier map. This helps define exactly where and when different parts and shipments were delayed, and how critical they are to your normal course of operations.
- Sourcing point: Where a manufacturer produces goods from raw materials (manufacturing plant)
- Storage point: Where goods are stored locally before shipping to the customer (inventory warehouse)
- Transfer point: Where stored goods are transferred to cargo containers (warehouse shipping docks)
- Transfer/storage point: Where containerized goods are stored during transfer goods before transfer to the next vessel (distribution centers, dockyards, train yards, etc.)
- Transfer (land): Where a truck or train transports cargo on roads or tracks to the next point of transfer (final destination is a shipyard dock)
- Shipping (sea): Where goods are loaded onto a cargo ship and transported (next port of call)
- Shipping (land): Where the cargo is transported by truck or rail to the final destination (en route for delivery)
- Final Destination point: Where the goods and delivered to the customer’s warehouse, retail store, or next point of manufacture (delivery receipt)
Governmental Order Test
Even businesses deemed essential or those who profited can apply for this fully refundable credit through a declaration of a State of Emergency by a governmental authority that affected their supply chain.
ERC Eligibility requirements for disruptions closure of ports or business lockdowns that fully or partially suspended operations for shipping companies and manufacturers of raw materials, components, or parts. Concrete proof that your business experienced financial losses to a lack of ability to provide goods or services during these times is essential to validate your claim.
Beyond those who experienced supply chain issues, essential businesses like restaurants with on-site dining restrictions and healthcare facilities not able to perform elective surgeries can be considered partially suspended.
- Limited hours of operations, or limited working hours for employees subject to a curfew
- Limited use of physical space for employees who could not perform comparable duties, responsibilities, or services from home
- Limited indoor seating for restaurants, or shut down for periodic cleaning and disinfecting
By demonstrating a clear link that government-ordered lockdowns caused a nominal impact on an employer’s total gross receipts, operating hours, and even an essential business that profited during the pandemic can still be classified as an eligible employer.
Supply Chain Disruptions
Any further governmental order that affected links in your US supply chain can help entities in all industries. Along with a tax advisor, a tax lawyer is recommended to help determine who qualifies for the ERC using local or state shutdown orders to become eligible.
LA Port Congestion
In January 2020., wait times and the number of anchored ships outside the ports of Los Angeles and Long Beach, California steadily increased. A shortage of truckers and issues with disposing of empty containers compounded the effect of the port’s logistical issues. In addition, local government mandates limited the work and interactions of port employees. In the first quarter of 2021, over 700 Los Angeles dockworkers were infected with COVID which had a massive ripple effect on shipping timelines.
Supply chains affected by shutdowns in foreign jurisdictions, increased demand for raw materials, local worker shortages, and broad economic factors generally are non-eligible for the ERC. Other non-qualifiers include voluntary restrictions and work-from-home requirements for jobs that could be performed remotely.
Profit losses due to a lack of demand or increased costs of following CDC recommendations, along with stay-at-home orders for customers, as well as social distancing and a requirement to wear face coverings typically won’t help you qualify.
Below are examples that do not qualify on their own:
- Trucking logistical issues that led to delays in receiving goods
- Labor shortages that led to an inability to procure supplies
- Normal supplier failure when comparable products were available from an alternative supplier
- International supply chain issues outside of US soil that limit commerce or affected an employer’s business operations.
A supplier that was considered a non-essential business that received governmental orders stating they must close for a defined period of time can help you qualify via the full or partial suspension test. However, non-enforceable government recommendations, along with supply and demand issues abroad are nonqualifiers.
A supplier’s temporary, full, or partial suspension of operations would not automatically qualify your business for the following quarters. The calculation of qualified wages claimed under the supply chain provision must be date specific for when the government order was in effect.
Asian Port Closures
In the journey from Asia to ports of call in Europe and North America, only the ports affected by US government shutdown orders can help you qualify. Even though many intermediary ports, especially those in Asia caused numerous shipping delays, COVID-19 restrictions and protocols on foreign soil are not eligible.