IRS Guidance May Narrow Employers’ Eligibility For COVID Tax
Washington, D.C. (August 31, 2023) – The IRS issued a Memorandum last month addressing when an employer may be considered to have experienced a full or partial suspension of operations during the COVID-19 pandemic in 2020 or 2021 for purposes of an employment tax credit, and the agency’s guidance indicates it may be seeking to retroactively narrow availability of the credit.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) Pub. L. No. 116-136, 134 Stat. 281 CARES Act, as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Pub. L. No. 116-260 (the “Relief Act”), was enacted to provide an employment tax credit to qualified private sector businesses and tax-exempt organizations that despite the COVID-19 pandemic continued to operate during calendar year 2020 or 2021, but either (i) had their operations fully or partially suspended due to orders from an appropriate governmental authority, or (ii) saw their business experience a significant decline in gross receipts.
For calendar quarters in 2020, taxpayers that qualify as eligible employers can claim an employee retention credit (the “ERC”) against the employer share of Social Security tax equal to up to 50% of the qualified wages they paid to employees after March 12, 2020, and before December 31, 2020. Qualified wages are limited to $5,000 per employee in 2020. Generally, the ERC may be taken in 2021 only for calendar quarters through September 30, 2021, unless the entity qualified as a recovery start up business during the third and fourth quarters of 2021, in which case the ERC may be available for those quarters. The maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $21,000 per employee in 2021. The period for which an eligible employer may apply for the ERC is limited to the actual number of days that the business was partially or fully suspended as a result of governmental orders (as defined below) related to COVID. The credit is determined on a quarterly basis.
On July 21, 2023, the IRS released Office of Chief Counsel Memorandum number AM 2023-005 (the “Memorandum”), addressing in part whether an employer experienced a full or partial suspension of the operation of a trade or business under Section 2301 of the CARES Act or the Internal Revenue Code due to a supply chain disruption resulting from orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the coronavirus disease. The Memorandum is a generic legal advice memorandum and constitutes internal IRS legal advice by the Office of Chief Counsel to assist IRS service personnel in administering their duties. It is not binding law and cannot be used or cited as precedent.
The Memorandum contends that an employer must demonstrate that a governmental order applicable to a supplier of critical goods or materials caused the supplier to suspend operations during a quarter and that the employer was unable to obtain critical goods and materials, thereby causing a full or partial suspension the employer’s business operations during that quarter.
Here are the key messages from the Memorandum:
- If the Employer was able to continue its own business operations despite the supply chain disruption, but had a surplus of critical goods provided by the supplier, it was not subject to a full or partial suspension of operations.
- If a supplier’s goods were stuck at a port and the employer could not identify any specific governmental order applicable to the supplier or any specific governmental order that caused the bottleneck at the port, the employer cannot claim a full or partial suspension of operations. Even if COVID-19 was a contributing factor to a port bottleneck or a truck driver shortage also was a factor, the employer must substantiate that the bottleneck at the port and the suspension of business was a result of the orders.
- The Employer can qualify as an eligible employer during a quarter in which its business operations were fully or partially suspended due to a government order. Residual delays caused by a governmental order in place during a prior calendar quarter will not constitute a governmental order in subsequent calendar quarters once the order has been lifted, even if the delay is due to lingering effects from the prior governmental order.
- A business that was not subject to any governmental orders limiting commerce, travel or group meetings due to COVID-19 and that was able to obtain critical goods from another supplier at a higher cost is not subject to a full or partial suspension of operations.
- A large retail business that was not subject to any governmental orders limiting commerce, travel or group meetings due to COVID-19 in 2021 did not experience a full or partial suspension of operations because it was not able to stock a limited number of products and was forced to raise prices on other products that were in limited supply.
The IRS positions show a focus on revenue gathering and a lack of appreciation for the circumstances that employers were facing during 2020 and 2021. The lingering impact of governmental orders into subsequent quarters, the inability to obtain truck drivers and the continuing effects of COVID-19 on the economy and the inter-relationship of all of these factors all contributed to full and partial suspensions of business for thousands of employers.
Additionally, the Memorandum highlights why it is important for employers to consider efforts to mitigate the risk associated with claiming the ERC during the quarters in which it was available in 2020 and 2021. The IRS appears to be retrospectively endeavoring to narrow ERC availability to the many employers who navigated the government orders that imposed a more than nominal impact on business operations during the height of the COVID-19 pandemic in 2020 and 2021.
The attorneys in Lewis Brisbois’ Tax Practice are available to help employers understand their ERC positions. For more information on this development, contact the authors of this alert. Visit our Tax Practice page for additional alerts in this area.
Philip Hinson, Managing Partner - Charlotte, NC
David Kern, Managing Partner - Akron, OH
Steven Holtzman, Partner