On July 21, the IRS Office of Chief Counsel released a generic legal advice memorandum (GLAM) concerning eligibility for the ERC due to a supply chain disruption. Though the IRS has cautioned employers to be careful when claiming the ERC and to not claim the credit if they are ineligible, little guidance has been issued illustrating specific situations in which an employer might be ineligible for the credit. In the context of supply chain disruption, the GLAM provides the type of specific guidance taxpayers have been waiting for.
Generally, an employer might be eligible to claim the ERC if, among other conditions, during 2020 or the first three calendar quarters of 2021 either of the following applied:
Question 12 in the FAQ included in Notice 2021-20 addresses whether 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, all of the following apply:
The GLAM illustrates the rules of question 12 in Notice 2021-20 using five scenarios with the following key takeaways:
While the GLAM is informal IRS internal guidance, it provides insight into how narrow the IRS views supply chain disruption and question 12 in Notice 2021-20. The IRS recently announced that it has worked through most of its backlog of ERC claims and is shifting its focus to increase scrutiny on questionable ERC claims, including ramping up its audit and criminal investigation efforts, and is focusing on both promoters and the businesses filing the claims. The GLAM provides insight into one of the areas that could result in denial of an ERC claim. Hopefully, the IRS will provide similar additional guidance to allow employers to better understand its position on ERC eligibility. Employers that are concerned that an already-filed ERC claim might be denied should consult their tax adviser to evaluate the claim and, if necessary, discuss options for how to correct it. Additionally, taxpayers considering filing an ERC claim should consult their tax adviser prior to doing so to determine whether they qualify for the credit.
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