Employee Retention Credits (ERC) offer one of the most valuable tax refund opportunities for businesses that kept employees on payroll during COVID-19. However, claiming these credits requires proving that your business meets specific eligibility criteria. The IRS expects thorough documentation and clear evidence, so knowing exactly what you need to prove is essential for a successful claim.
Understanding ERC Eligibility
Employee Retention Credits are a refundable payroll tax credit available for certain wages paid in 2020 and the first three quarters of 2021. To qualify, your business must meet at least one of the two main eligibility tests: a significant decline in gross receipts or a full/partial suspension of operations due to a government order.
The Two Main Paths to Proving Eligibility
1. Revenue Decline Test
To prove a decline in gross receipts, you must compare each quarter in 2020 or 2021 to the same quarter in 2019.
- 2020: At least a 50% drop in gross receipts.
- 2021: At least a 20% drop in gross receipts.
Proof Needed:
- Quarterly profit and loss statements.
- Bookkeeping or accounting reports.
- Bank records that match reported revenue.
2. Government Order Test
If your business operations were fully or partially suspended due to a government order, you can qualify even without a revenue drop. This could include:
- Capacity restrictions.
- Mandatory closures.
- Travel bans.
- Supply chain disruptions caused by shutdowns.
Proof Needed:
- Copies of local, state, or federal orders that applied to your business.
- Internal memos or documentation showing operational impacts.
Additional Eligibility Considerations
- PPP Loan Interaction: You can claim ERC and PPP, but not for the same wages. Careful wage allocation is required.
- Recovery Startup Businesses: If you began operations after February 15, 2020, you may qualify for Employee Retention Credits in the last two quarters of 2021 under special rules.
- Aggregation Rules: Businesses with multiple related entities may need to combine their financials for eligibility purposes.
Why Documentation Is Critical
The IRS requires clear evidence to support any Employee Retention Credits claim. Without proper documentation, your claim may be delayed, reduced, or denied. Keeping organized, detailed records protects your business and ensures you can respond quickly if the IRS requests more information.
Common Mistakes in Proving ERC Eligibility
- Failing to keep copies of government orders.
- Using estimates instead of precise revenue figures.
- Overlooking partial suspensions that could qualify.
- Ignoring eligibility for certain quarters due to misunderstanding the rules.
Steps to Ensure a Strong ERC Claim
- Gather Financial Records for 2019, 2020, and 2021.
- Collect Government Orders that impacted your operations.
- Document Operational Changes with timelines and details.
- Consult ERC Specialists to review eligibility and maximize your claim.
Conclusion
Proving ERC eligibility requires more than just meeting the criteria—you must back it up with solid evidence. By gathering accurate financial data, retaining relevant government orders, and documenting operational impacts, you can build a strong case for your Employee Retention Credits claim. A well-prepared eligibility file not only increases your chances of approval but also speeds up the refund process, helping you unlock the full financial benefit you deserve.
