The Employee Retention Credit (ERC) introduced in March 2020 was a key tool in helping employers keep their teams intact while the worst of the COVID-19 pandemic played out. While the ERC ended on September 30, 2021, eligible employers can still amend their payroll tax returns to take advantage of the credit. For eligible quarters in 2020, the deadline to amend those payroll filings is April 2024, while the deadline for quarters in 2021 falls to April 2025.
These rolling deadlines make two new pieces of federal government guidance related to the ERC particularly important:
Suspension of Operations. Chief Counsel AM 2023-005 (released July 21, 2023) addresses when an employer is considered to have a full or partial suspension of operations due to a supply chain disruption.
Excess Employment Tax Credits. Final regulations (issued July 24, 2023) address the recapture of excess employment tax credits under various pieces of COVID-19 legislation.
Suspension of Operations Due to a Supply Chain Disruption
A March 2021 IRS Notice (2021-20, Question 12) stated that a company may qualify for the ERC if a government order during the pandemic suspended the operations of one of their critical goods suppliers. This conclusion led many employers to believe they qualified for the ERC based on the ongoing supply chain issues most businesses were dealing with. The Chief Counsel Memo expands and clarifies Question 12, stating that a “supply chain disruption, by itself, does not rise to the level of a full or partial suspension…” needed to qualify for the ERC. Specific facts and circumstances — including that the disruption may not be significant enough to be considered a suspension of operations, the employer may have been able to use an alternate supplier and governmental orders did not apply directly to the employer — may result in the employer being ineligible to take the ERC. Consequently, even a supply chain disruption of a critical good as a result of a government order may not qualify an employer for the ERC in certain situations.
If you are an employer who has taken or is contemplating taking the ERC based on a supply chain disruption, be aware of these key points:
You must be able to substantiate that:
If your business can continue operations as a result of having a reserve or surplus of a critical good ahead of the disruption, your operations will not be considered fully or partially suspended.
Residual supply chain disruptions caused by government orders during one calendar quarter will not qualify your business in subsequent quarters when the orders are no longer in place.
Availability of critical goods from an alternative source, even if your cost is significantly higher, will not qualify your business for a full or partial suspension.
Your inability to obtain non-critical goods will not result in a full or partial suspension of operations.
If your business is considering applying for the ERC based on supply chain disruptions, review this guidance to help you determine your eligibility based on your company’s specific set of facts and circumstances.
Final Regulations on the Recapture of Excess Employment Tax Credits
These final regulations adopt the proposed regulations issued in July 2020 and September 2021 regarding the recapture of erroneous refunds of the ERC, as well as the paid sick and family leave credits, under various pieces of COVID-19 legislation. It is important to note that these regulations are not intended to be the IRS’ sole method of recovery but rather an alternative method to use at their discretion.
Regarding the ERC, the final regulations state that if you claimed and received the credit but the IRS determined you did not actually qualify for it, they will treat these erroneous refunds as underpayments. That means the government can recover the erroneous refund as well as potential penalties and interest without having to initiate litigation against the employer.
Read recent ERC FAQs from the IRS.
The regulations also clarify who may be assessed when third-party payors claim the credits on behalf of their common law employer clients:
In the case of a third-party payor other than a Certified Professional Employer Organization (CPEO), both the third-party payor as well as the common law employer will be held accountable. A similar result applies in the case of remuneration paid by a CPEO to non-worksite employees.
However, for remuneration paid by the CPEO to worksite employees, only the CPEO is treated as an employer, and therefore is the sole entity held accountable.
Businesses using a third-party payor should understand these distinctions to determine whether the assessment and collection procedures outlined in the regulations apply to them and/or the third party.
The ERC assisted businesses in a time when many could not afford to keep employees on the payroll. The ERC is still a viable tax strategy for businesses who qualify. Be sure to evaluate these new rulings closely with your tax advisers to position your business in the appropriate way moving forward.
Contact Robert Venables at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.