New IRS Guidance Sheds Doubt on Whether Businesses Properly Claimed the ERC Based on Supply Chain Disruptions

The IRS released a generic legal advice memorandum (GLAM) to clarify when and whether a business owner could have properly qualified for the employee retention tax credit (ERC) based on supply chain disruptions. The GLAM contained five different scenarios where supply chain disruptions did not qualify the business for the ERC. Under the guidance, some type of governmental order must have caused the supplier to suspend its operations during the pandemic. That suspension, in turn, must have caused the business claiming the ERC to suspend its own business operations. It is up to the business to provide documentation to prove that the governmental order applied, and to substantiate the link between that governmental order and the business owner's own suspension of operations. If the business cannot substantiate the governmental order, the business will also not be treated as having a partial suspension of operations. Importantly, business owners should be aware that even dramatic price increases or inability to offer some (but not all) of the business' goods and services does not equate to a partial suspension. Business owners who justified ERC claims based on supply chain disruptions should maintain careful documentation in anticipation of a future IRS challenge. For more information on , visit Tax Facts Online. : Q . Note: Q is updated.