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How To Qualify as a Recovery Startup Business for the Employee Retention Credit

How To Qualify as a Recovery Startup Business for the Employee Retention Credit

 

The COVID-19 pandemic was challenging for many small businesses. Despite this, countless startups have successfully made their debut during the COVID-19 pandemic. If you launched a venture after February 15, 2020, you might qualify as a recovery startup business and be eligible for the Employee Retention Credit (ERC). Let’s take a closer look at what the ERC is and how you may benefit from it.

 

What Is the Employee Retention Credit?

The ERC is a refundable tax credit claimed on quarterly payroll tax filings. It was originally part of the CARES Act of 2020 and designed to help business owners who have struggled financially as a result of the pandemic.

The American Rescue Plan of 2021 made changes to the ERC by extending it to add “recovery startup businesses.” Depending on your situation, you may be able to claim the credit retroactively for both 2020 and 2021.

 

What Is A Recovery Startup Business?

Per the American Rescue Plan Act, a business that opened its doors during the pandemic can receive the credit. Your startup may be eligible if you meet the following criteria.

  • You started your business on or after February 15, 2020.
  • Your annual gross receipts are less than $1 million for the individual 2020 and 2021 tax years.
  • You have one or more W2 employees, not including owner-operators or family members.

For example, if you launched a food delivery business on April 1, 2020 with three employees and earned $500,000 for the 2020 and 2021 tax years, then you’re considered a recovery startup business and a perfect candidate for the ERC.

Unfortunately, if you started your venture in the second quarter of 2021, you won’t be able to claim any credit for 2020 or for the first two quarters of 2021. But, if you meet certain revenue reduction or government restriction criteria, you might be able to claim the credit for earlier quarters.

In addition, if you purchased an existing business that was in operation on or before February 15, 2020, you may or may not be considered a recovery startup business. It all depends on your unique circumstances. Since the rules around this particular eligibility requirement are complex, working with ERC tax experts can help you determine if you qualify.

 

What Can My Business Claim?

If you’re considered a recovery startup business, you can receive a credit in the amount of $7,000 per worker, per quarter. The max is $50,000 for the final two quarters of the year. To maximize your credit, pay close attention to your gross receipts and make sure you didn’t go over the $1 million annual revenue run rate limit for the 2020 and 2021 tax years.

Let’s say you have eleven employees. If you multiply eleven employees by $7,000 per employee in quarter 3, you get $77,000; however, your business is limited to $50,000, unless your business can qualify under revenue reduction or governmental orders. When you perform the same calculation for quarter 4, you also come to $77,000 with the same limitation, however only a Recovery Startup Businesses can qualify in the 4th quarter of 2021. As a startup with eleven employees, you’d receive a $100,000 check from the IRS. That’s a significant amount of money!

You can put these funds toward inventory, equipment, a new office space, marketing, or any other expenses that can help grow your business. Another option is to simply distribute the cash to the owners. There is a lot of flexibility with how you may use the ERC.

 

What Are Qualified Wages?

Under the CARES Act, the definition of qualified wages depends on the size of your business.

If you’re a smaller venture with an average of 100 or fewer full-time or full-time equivalent employees in 2020 or fewer than 500 full-time employees in 2021, qualified wages include all wages you paid to your employees, whether they were working or not. This includes qualified health plan expenses during an eligible quarter. A full time employee (FTE) is defined as anyone that worked more than 30 hours on average per week.

In the event you had more than the 100 (FTE’s) in 2020 or 500 (FTE’s) across all affiliated businesses in 2021, qualifying wages have a slightly different meaning. These are wages that were paid to an employee for time that they weren’t working due to either suspended operations or a substantial decline in gross receipts.

 

How To Claim The ERC

While you’ve likely already filed your taxes for 2020 and 2021, you can still claim the credit retroactively. To do so, fill out Form 941-X. Be prepared to calculate your total qualified wages and health insurance costs for each quarter. You’ll subtract that amount from your deposit on Form 941. ERC Calculations and rules can be complex so often it makes sense to consult ERC tax experts for help.

If you meet the criteria for a recovery startup business, you owe it to yourself to take advantage of the ERC. While it’s widely available to many startups who launched during the pandemic, it’s often untapped. The ERC can give you the extra cash you need to meet a variety of business goals.

 

Deadline for 2020: April 15, 2024

Deadline for 2021: April 15, 2025

 

 

Also, See

 

Employee Retention Tax Credit (ERTC) Service

How do you claim the ERC?

Database of COVID National, State and Local Shutdown Orders

 

Other State Credits and Incentives

Georgia Top Credits & Incentives

Georgia Retraining Tax Credit

Georgia Job Tax Credit

Georgia Quality Jobs Tax Credit

Georgia Investment Tax Credit

Georgia Port Bonus Tax Credit

Tennessee Top Credits & Incentives

Standard, Enhanced, Super Job Tax Credits

Industrial Machinery Tax Credit

South Carolina Top Credits & Incentives

Mississippi Top Credits & Incentives

 

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