The Employee Retention Credit (ERC) has been a lifeline for many businesses grappling with the economic fallout of the pandemic. However, the process of claiming ERC requires more than just filling out forms—it demands thorough substantiation. Let’s dive into why substantiation matters and how businesses can ensure compliance with IRS requirements.

ERC substantiation isn’t merely a bureaucratic hurdle; it’s the foundation upon which claims rest. Without proper substantiation, claims may face delays, reductions, or outright denials. 

So, what exactly does substantiation entail? It involves gathering and documenting various pieces of evidence that demonstrate the impact of COVID-19 on business operations. This includes:

1. Government Orders: Businesses must document how their operations were affected by specific federal, state, or local COVID orders. This means having records of the actual orders and detailing their impact on day-to-day operations.
2. Financial Records: Detailed financial records are crucial for showing the decline in business and linking it directly to the effects of the pandemic. Comparisons with pre-pandemic scenarios and quarterly declines are essential here.
3. Payroll Data: Records of employed individuals during the specified period, typically in the form of payroll data, are necessary for substantiating ERC claims.
4. Narrative Documentation: A narrative detailing how COVID-19 impacted day-to-day operations is also essential. This includes modifications made to working arrangements, changes in service offerings, and interactions with employees, clients, and suppliers.

Organizing and categorizing relevant documents is key to successful substantiation. Best practices include keeping emails, memos, statements, payroll records, and mandates organized and accessible for review. Creating a narrative document that ties together the pieces of evidence into a coherent story can also strengthen the claim’s validity.

Finally, consulting with professionals specializing in ERC claims is highly recommended to ensure compliance with IRS requirements. These experts can review documentation, offer guidance on meeting IRS standards, and help navigate the complexities of the ERC process.

In conclusion, proper substantiation is essential for ERC claims. By understanding the requirements, organizing relevant documents, and seeking professional guidance when needed, businesses can maximize their chances of successfully claiming ERC and securing much-needed financial relief.

Disclaimer: We want to remind you that while we do have expert tax attorneys and tax professionals working for our team and for our clients, Brad Mewes is not an attorney, and we are certainly not your attorney. But we do want to help. Reach out and schedule a time to speak with me or one of my teammates to review your unique set of facts and circumstances and see how we might be able to help you.