In response to queries and confusion over eligibility for the Employee Retention Credit (ERC) related to supply chain disruptions, the Internal Revenue Service (IRS) issued a Generic Legal Advice Memorandum (GLAM) on July 21 to clarify the interpretation of this section of the CARES Act along with subsequent IRS GLAMs and guidance notices.

In essence, the IRS clarified that an employer could claim the ERC for either a full or partial shutdown and/or gross revenue losses because of supply chain disruptions ONLY IF a government order applies to the employer’s own operations, OR a government order applies to the employer’s supplier who is unable to fulfill the employer’s critical supply needs and this adversely impacts the employer’s ability to run its operation or receive revenues, AND the employer is not able to compensate for the supply chain disruption by utilizing an alternate supplier who can fulfill the employer’s supply needs.

Further, there must be a documented causal chain between the supplier’s suspension of order fulfillment due to a government order and the employer’s need to fully or partially suspend operations as a direct result of this supply suspension. The GLAM offers five helpful, illustrative scenarios to further explicate this clarification on ERC eligibility.