Salt Lake City, Utah – In my last Blog I briefly discussed that most companies that have claimed the ERC did so based on one of two concepts. The first is supply-chain disruption or impact and the second is CDC/OSHA restrictions or modifications. In the next few Blogs, I will discuss supply-chain disruption or impact and what the IRS is looking for in determining eligibility for the ERC based on supply-chain disruption.
In claiming the ERC, I have heard from many taxpayers that “we were eligible (or told we were eligible) because of a supply chain disruption.” Often, we see this eligibility stretched all the way through Q3 of 2021. Here is the problem, supply chain disruption is based on the following language from IRS Notice 2021-20 which states:
“An employer may be considered to have a full or partial suspension of operations due to a governmental order if, under the facts and circumstances, the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations. If the facts and circumstances indicate that the business’s operations are fully or partially suspended as a result of the inability to obtain critical goods or materials from its suppliers because they were required to suspend operations, then the business would be considered an eligible employer for calendar quarters during which its operations are fully or partially suspended and may be eligible to receive the employee retention credit.”
So, there is nothing in the language that suggests that merely having trouble obtaining goods or materials is sufficient alone to conclude a supplier-based partial suspension. To determine eligibility using the supplier-based partial suspension rule, the taxpayer must have knowledge that the supplier was shut down! My experience with ERC Mills is that the ERC is calculated based on representations made by the taxpayer and no verification is done.
In my next Blog I will discuss the taxpayer’s suspension can only run concurrent to the supplier’s suspension.
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