On July 21, the IRS released General Legal Advice Memorandum (GLAM) AM 2023-005 regarding ERC-qualifying supply chain disruptions.
A GLAM is internal IRS legal advice by the Office of Chief Counsel, meant to assist IRS service personnel. GLAMs are not binding law and cannot be used or cited as precedent, but they do show how the IRS would likely conclude on similar issues under audit.
And as the IRS continues to warn taxpayers about Employee Retention Credit (ERC) scam promotions and aggressive ERC position, it’s important to understand your risk for tax, interest and penalties — even when relying on third-party advisory.
Here is what you should know about the GLAM and its potential impacts on your business:
A closer look at ERC eligibility
Many taxpayers have used third-party firms to determine eligibility for the ERC, often based on the position that they were subject to a government order that resulted in a full or partial suspension of business operations.
Generally, ERC-qualifying businesses:
- Were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021.
- Or experienced the required decline in gross receipts
- during the eligibility periods during 2020 or the first three calendar quarters of 2021.
While supply chain disruptions, as a result of government orders, could be significant to a business, determining whether it’s a qualifying event remains complicated.
Understanding supply chain disruptions
Previously, the only IRS guidance on qualifying supply chain disruptions was given in Notice 2021-20, which reads as follows:
- Question 12: If a governmental order causes the suppliers to a business to suspend their operations, is the business considered to have a suspension of operations due to a governmental order?
- Answer 12: 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. If the facts and circumstances indicate that the business’s operations are fully or partially suspended as a result of the inability to obtain critical goods or materials from its suppliers because they were required to suspend operations, then the business would be considered an eligible employer for calendar quarters during which its operations are fully or partially suspended and may be eligible to receive the employee retention credit.
- Example: Employer A operates an auto parts manufacturing business. Employer A’s supplier of raw materials is required to fully suspend its operations due to a governmental order. Employer A is unable to procure these raw materials from an alternate supplier. As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations for a period of time. Under these facts and circumstances, Employer A would be considered an eligible employer during this period because its operations have been suspended due to the governmental order that suspended operations of its supplier.
In the recent GLAM, the IRS legal counsel looked at five examples around supply chain disruption and concluded none of the situations would qualify the taxpayer for the ERC. However, the situations listed in the examples have been commonly cited by third-party ERC firms as ERC-qualifying events.
Moving forward, your business needs to understand the new guidance on what determines an ERC qualified supply chain disruption.
ERC scams remain prevalent, and while third-party advisory services can be helpful, be wary of bad actors. Knowing the ERC requirements will help you secure the right credit opportunities while avoiding potential penalties.
How Wipfli can help
Wipfli’s tax team is ready to help you navigate the complex eligibility rules for important tax credits, including the ERC. Contact us to learn more about our comprehensive approach to maximizing your tax strategy.
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