How Does the Employee Retention Credit Apply to Your Recovery Startup Business?

The COVID-19 pandemic changed the way the world operated and presented several new challenges for business owners across the globe. From government mandates to profit loss, businesses have had to figure out how to navigate the new economy and stay afloat. Thankfully for businesses in the US, there are several economic relief programs that were created to help them do so.

Businesses that were created after February 15, 2020, however, faced a unique hardship because they started in the middle of the unprecedented pandemic. These businesses, also known as “Recovery Startup Businesses,” were not eligible for the widely discussed Paycheck Protection Program (PPP) loans, but they could still be eligible for up to $100,000 in credits through the Employee Retention Credit (ERC), thanks to a recent change in the federal law.

What Is a Recovery Startup Business?

A Recovery Startup Business is a business that started performing work and receiving income on February 15, 2020, or later. This means if you set up your LLC in December of 2019 but did not start operation until March 2020, you could be eligible. The Recovery Startup Business serves as its own category and does not focus on the traditional requirements of ERC such as full/partial suspensions and a decline in gross receipts. This is aimed specifically at business owners and entrepreneurs who took a risk to create something new for the economy during a difficult time.

Key Components of a Recovery Startup Business

The federal government recognized that starting a business during the initial wave of COVID was extremely tough, so they passed the American Rescue Plan Act in 2021 which aimed to assist newer companies with their cash flow and help them through the pandemic. The American Rescue Plan Act made it so new businesses that opened during the pandemic will be eligible to get stimulus funding by identifying them as “Recovery Startup Businesses.”

In order for a company to be considered a recovery startup business, the following criteria must be met:

  1. Began business on February 15, 2020, or later
  2. Average gross receipts under $1,000,000 for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined
  3. Do not meet other eligibility criteria

If this sounds like your business, you could receive up to $100,000 in the form of a fully refundable tax credit from the IRS!

What Is the Employee Retention Credit?

The Employee Retention Credit (ERC) was first introduced by the Coronavirus Aid, Relief, and Economic Security Act (CARES) in 2020. The main goal of the program was to reward employers for keeping employees on their payroll. The ERC benefits businesses both small and large that were impacted by the challenges posed by the pandemic, covering several issues ranging from a decline in revenue to supply chain issues to impacts from government-mandated shutdowns. This tax credit is often missed or overlooked because businesses are uncertain about the eligibility requirements for newer businesses and because the program has been amended several times since the first rollout. The most recent amendment in December 2021 expanded the eligibility requirements, making this credit more widely available to employers including recovery startups. Businesses who didn’t file for the tax credit still have time to file retroactively.

How the Tax Credit Works

Unlike a PPP loan, the ERC doesn’t need to be paid back. It is a fully refundable tax credit available to eligible businesses that were impacted by full or partial suspensions or suffered from a decline in gross receipts. And while these criteria (i.e.: gross receipts test and suspensions) may not apply to recovery startup businesses, such startups may still be able to claim up to $50,000 for both the third and fourth calendar quarters of 2021.

Other eligibilities to consider include:

  • You must have W2 employees on payroll because the credit does NOT apply to independent contractors.
  • Your recovery startup business must also have had to make under $1,000,000 in the first year of operation.

What Can My Business Claim?

If your business is considered a recovery startup business, you can claim around $7,000 per employee on a tax credit as long as the employee is paid $10,000 or more in the eligible time periods (Q3 and Q4  of 2021), but the total amount is capped at $50,000 per quarter. Because recovery startup businesses are given two quarters to apply, you are looking at a potential $100,000 tax credit for your payroll taxes, which could greatly impact your business.

How Do I Claim My Credit?

As a new small business owner, tax credits such as ERC might seem time-consuming and overwhelming. But Stenson Tamaddon aims to make the process as minimally disruptive for you as possible. Our experienced specialists use our proprietary technology to prioritize compliance, maximize your returns, and reduce the headache of filing manually.

Reach out to us today to get started.

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