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Supply Chain Disruptions and the Employee Retention Credit

By Michael Galdieri

July 9, 2021

width=300The world of packaging has come out of the COVID-19 pandemic strong and is helping America get back on its feet. In an effort to accelerate businesses out of recovery mode and back into growth mode, Congress made legislative changes to significantly cut taxes for businesses who kept employees throughout the pandemic through federal incentives.

The Employee Retention Credit (ERC) is particularly applicable to the packaging industry, as it can completely eliminate a business’s payroll tax and generate a cash refund, if the company had business disruptions, including supply chain .

These disruptions oftentimes stem from government orders that have either forced packaging companies to halt operations or had an effect on suppliers and their ability to fulfill necessary orders.

Employee Retention Credit Background

The ERC, which was put in place as a part of the Coronavirus Aid, Relief, Economic Security (CARES) Act, offers U.S. businesses a refundable credit that they can claim on qualified wages, which include health insurance costs paid to employees.

Packaging businesses can claim the credit for all of 2020 even if the business claimed PPP. The American Rescue Plan took the credit a step further, allowing taxpayers to claim the incentive for all of 2021 as well.

In order to qualify for the credit, businesses must be able to establish that they were either fully or partially suspended due to orders from an appropriate government authority in any calendar quarter or that they experienced a significant decline in gross receipts. It’s important to note that businesses that were not suspended can still qualify if their suppliers and vendors were fully or partially suspended and if that is having a material effect.

How AICC Members Qualify

While most businesses across the country were closed in 2020 and thus can qualify for that year, boxmakers have continued to face supply chainand those disruptions could qualify AICC members for significant tax savings in 2021. We are seeing businesses regularly claim six to seven figures in cash and credits for the first quarter alone.

As an example, if a boxmaker’s paper supplier is able to supply only 80% of what is ordered due to governmental orders, reducing the output of the company, that would be deemed a qualifying disruption. Even if the company itself is deemed essential, is profitable, and is operating at full capacity, it may still be considered a partial suspension due to supplier .

Ideally, the IRS would want to have seen that the taxpayer company made a reasonable attempt to find an alternative option when their primary supplier was unable to fulfill their orders. Even further, the impact from suppliers being unavailable—or any other work disruptions—needs to have more than a nominal effect on the company’s business operations.

While the IRS has attempted to put forward guidance clarifying the incentive, there is still a significant amount of ambiguity surrounding the ERC. Many businesses are trying to claim the credit themselves or by using a financial advisor who is simply asking them to earmark which employees they want to claim the credit on. That may be ill-advised as proper documentation, and substantiation of disruptions, supply chaingovernment orders—at an employee-by-employee level—would be prudent.


width=108Michael Galdieri is associate director at alliantgroup’s New York office. He has more than 15 years of experience working with startups to Fortune 500s. He has also partnered closely with CPA firms to uncover significant tax savings for their clients. He can be reached at 844-898-3280 or michael.galdieri@alliantgroup.com.

 

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