Supply Chain Issues and the Employee Retention Credit

The Employee Retention Credit (ERC) is a godsend to many businesses that have been financially impacted by the COVID-19 pandemic. And while it is an attractive opportunity to recover significant funds, the credit’s complexity combined with the ambiguity of the IRS’ series of guidelines have scared many businesses away. Applying for the credits requires advanced tax expertise, so small businesses everywhere are turning to tax and payroll experts like ERC Specialists for help. 

That is a prudent move as understanding and applying for these high-value tax credits is a serious undertaking. The good news is that many businesses that have been affected by supply chain disruptions are now qualified to receive the funding. The IRS specifically calls this out in a recent notice:

“Per IRS Notice 2021-20, 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. This supply chain disruption under the facts and circumstances would qualify the employer for the Employee Retention Credit (ERC).”

ERC Background

The Employee Retention Credit (ERC) is a refundable payroll tax credit introduced in 2020 and subsequently amended and expanded. It was offered as a means to encourage businesses nationwide to retain employees throughout the COVID-19 pandemic. This critical tax credit provides up to $26,000 per eligible employee, and it’s available now to small businesses, even if they accepted PPP loans.

The America Rescue Plan has now made an additional amendment to the policy that extends the ERC covered time period to cover wages paid between March 22, 2020 to September 30, 2021. That’s great news if your business was financially impacted by the pandemic, as most in the United States were. 

Qualifying for the ERC Tax Credit

Since early 2020, businesses have dealt with supply chain issues. The COVID-19 pandemic brought the distribution of goods to a grinding halt, not only in the U.S. but around the globe. Manufacturing, construction, and retail have been hardest hit by the disruptions, but food services, hospitality, and even healthcare have been impacted.

These disruptions were often a result of governmental orders that required businesses to halt their operations. Suppliers were similarly affected, and their ability to fulfill customer orders continues to be a challenge to this day. In fact, supply chain issues are not expected to recover until well into 2022.

If this sounds like your business, you may be entitled to valuable tax credits through ERC. Let’s look at some examples.

Qualifying Disruptions for ERC Benefits

Let’s say your restaurant has 50 tables, but social distancing requirements forced you to limit seating to just half capacity at 25 tables. That constitutes a partial shutdown, and you may qualify for the ERC tax credit.

How about if your packaging supplier could only fulfill 70 percent of your order because of governmental restrictions, and it reduces your ability to sell your products? That is considered a qualifying disruption. Even if your company is open and serving customers at full capacity, the supplier’s issues could still be considered a partial suspension.

Perhaps you run a hotel and you’re putting millions of dollars into a renovation. Your lobby furniture was set to arrive over a year ago, but it has still not been delivered. You’ve had to cancel promotions and press events that were scheduled around the renovation as the timeline keeps being pushed back.

Of course, your financial impact should be significant and must be substantiated. Our team at ERC Specialists can help you prepare the appropriate documents to demonstrate the impact of supply chain issues on your business. If you meet either of the following two criteria, you’ll want to reach out to us immediately to get started on your ERC funding application, as there is a statute of limitations on the credit.

  • Full or partial suspension: Your business was either completely or partially suspended as a result of government restrictions that limited commerce, travel or group meetings due to the COVID-19 pandemic.
  • Significant decline in gross receipts: Your business experienced a significant decline in gross receipts in any quarter in 2020 or 2021 as compared to the same quarter in 2019. Significant decrease is defined as 50 percent less than 2019 during any quarter of 2020; in 2021, it’s 20 percent.

How Much Can I Get from the ERC Tax Credit?

The maximum credit in 2020 is equal to 50 percent of eligible employee wages (up to $10,000 per year), which equals a $5,000 credit per employee for the calendar year 2020.

In 2021, the maximum credit is equal to 70 percent of eligible employee wages (up to $10,000 per quarter), which equals a $7,000 credit per employee per quarter.

That means if you are eligible to receive ERC funding for the full coverage period, your maximum credit is $26,000 per W-2 employee. 

At ERC Specialists, we have the payroll and tax expertise you need to help your business understand its eligibility and assist you in preparing the documentation you need to get ERC funding quickly. Don’t wait, Congress has only allocated a fixed amount of money to the ERC tax credit so businesses need to file promptly to get their share. Claim your valuable ERC tax credits today!