In an ongoing effort to curb abuse of the Employee Retention Tax Credit, the Internal Revenue Service (IRS) recently released a Generic Legal Advice Memorandum (GLAM) to further stress the strict requirements for claiming the Employee Retention Tax Credit (ERTC) based on a full or partial suspension of business operations related to supply chain disruptions.
The ERTC is a refundable credit against certain employment taxes paid by businesses impacted by the COVID-19 pandemic. To claim it, a dealership must have experienced either:
- A full or partial shutdown due to a government order related to the pandemic, or
- A gross receipts decline of at least 50% for the same calendar quarter from 2019 to 2020, or at least 20% for the same calendar quarter from 2019 to 2021 (only the first three quarters of 2021 qualify).
The Memorandum addresses the first bullet (full or partial shutdown) by describing several scenarios that do NOT satisfy the requirements for claiming the ERTC. Its analysis specifies that, to claim the ERTC based on a supplier’s inability to deliver critical goods and materials, a taxpayer must show that a qualifying governmental order caused the supplier and the taxpayer to suspend their business operations.
Some ineligible businesses have claimed the ERTC based on supply chain disruptions that are tangentially related to the COVID-19 pandemic. The GLAM makes clear that the IRS takes a strict view on this type of ERTC claim. IRS Commissioner Danny Werfel recently stated that the IRS was working aggressively to address a flood of fraudulent and erroneous ERTC claims.
Several accounting professionals have also expressed concern about the potential exposure of dealers who claim the ERTC based on a full or partial suspension of their operations.
Dealer who have claimed the ERTC based on a supply chain disruption (or are considering doing so) are encouraged to discuss the IRS Memorandum with their tax advisor.
Read more about the IRS General Legal Advice Memorandum regarding Employee Retention Tax Credits HERE.