Welcome to the latest installation of our “frequently asked questions” blog series. ERC Specialists is answering our top questions we receive from small businesses looking to file for Employee Retention Credit (ERC) tax credits.
This time, we’re answering: What is a recovery start up business and how does that work with ERC?
If you started a business in 2020 or 2021, kudos to you! You’ve faced unprecedented challenges and still persevered. We’re in awe. And we’ve got some good news. You may qualify for the Employee Retention Credit.
What is the ERC for Recovery Startups?
If you started your business operation after Feb. 15, 2020, you may be entitled to ERC benefits. The federal government is working hard to stimulate the economy and help fledgling small businesses in this post-pandemic(ish) world. They’re relaxing eligibility criteria and increasing the amount you can claim for each employee you’ve retained. They’re also extending the timeframe of the ERC program and giving businesses the opportunity to combine different programs to get the most benefits.
And the really great thing about ERC is that unlike PPP and some other programs, there is no defined way you must spend the funds, and you don’t have to repay them. Sounds like something you need for your startup? Keep reading.
The American Rescue Plan Act (ARPA) that was enacted into law in March 2021 changed the eligibility criteria (yes, again) for the ERC tax credits to include Recovery Startup Businesses.
How Does a Recovery Startup Business Qualify for ERC?
There are only a few stipulations for qualifying for the ERC as a Recovery Startup Business:
- You must have begun business operations on/after February 15, 2020.
- You must maintain average gross receipts that do not exceed $1 million for both 2020 and 2021.
- You must employ one or more employees (other than 50 percent owners).
- You may not qualify for the Employee Retention Credit through previously-issued qualifying events (full or partial suspension due to government orders or decline in gross receipts).
However, there are some limitations on qualifying. For example, if you own multiple companies or have a common ownership arrangement, the requirements are different (fear not, we’ll devote an entire blog to this topic!).
While Recovery Startup Businesses can’t claim the ERC credits for any of calendar year 2020 or Q1 and Q2 of 2021, you may claim the credit for these prior periods if you meet the government restriction or revenue reduction criteria. A bit confusing, but stay with us.
Recovery startup businesses can qualify for up to $50,000 in ERC credits for each quarter of Q3 and Q4 2021. Hooray!
All of these rules converge in many areas, so that’s why we always recommend working directly with a tax and payroll expert like ERC Specialists to delineate where and how you quality.
How Much ERC Funds Do I Qualify For?
As a recovery startup business, you are eligible to receive up to $7,000 per employee per quarter. The ERC funds are capped at $50,000 for the two eligible quarters for 2021.
Let’s look at an example. Let’s say you have 10 employees:
5 employees x $7,000 per employee = $35,000 in Q3 plus 5 employees x $7,000 per employee in Q4 = $35,000 for a total of: $70,000!
As a new business with 10 employees, you would receive a $70,000 payment from the IRS this year. Cha-ching!
What Recovery Startup Businesses Should Do Now
- Check your gross receipts. You must stay under the $1 million dollar threshold for both 2020 and 2021.
- File for the ERC for Q3 and Q4 2021 to claim the ERC credits.
- Remember most co-owners, spouses and family members will most likely not qualify as eligible employees
Now that you know what a recovery startup business is and how it works with ERC, contact ERC Specialists to get started, and claim the ERC benefits to which you’re entitled.