Updated: Jul 25
Businesses across all industries were impacted by lockdowns and regulations due to the COVID-19 pandemic in 2020. Even through 2021, businesses were suffering from serious financial loss because of COVID-19 safety precautions that either restricted their business from fully operating or closed it altogether.
Startup businesses who opened on or after February 15, 2020 were dramatically impacted. For them, there was much less time to create a financial safety net that could help them survive the pandemic.
What Is a Recovery Startup Business for ERC?
Businesses who opened for the first time on or after February 15, 2020 are considered startup businesses that could be eligible for the ERC tax credit to help them recover early losses as they started their business. These are considered “severely financially distressed employers” that qualify for the ERC tax credit to help them financially recover from the pandemic.
Startup businesses can be across any industry as long as they do not exceed $1 million in gross receipts for the 2020 tax year and have less than 100 employees. For example, a Silicon Valley startup that received multi-million dollars in funding and has 150 employees by the end of 2020 would not qualify for the ERC tax credit. However, a local salon that opened in early March 2020 and has five employees will qualify.
If your business began at the end of 2020, you may still qualify for the last quarter of the 2020 tax year. Startups who opened in 2021 may be eligible for the 2021 ERC tax credit, but they will not be eligible for the 2020 tax year.
American Rescue Plan Act
The American Rescue Plan was enacted in 2021 to provide additional stimulus and financial aid to businesses suffering from COVID-19 regulations. The Employee Retention Tax Credit was enhanced under the American Rescue Plan Act, which extended ERC’s availability for small businesses through December 2021. This allowed businesses up to $7,000 per employee per quarter for the 2021 tax year.
ERC Recovery Startup Business Rules
Not all startup businesses qualify for the ERC tax credit. They must meet the qualifications of the ERC tax credit to apply:
Businesses must have start on or after February 15, 2020.
Annual gross receipts cannot exceed $1 million dollars for the 2020 and 2021 tax years.
Businesses must have at least one W2 employee that does not include the owner-operators or family members
Businesses cannot have over 100 full-time or full-time equivalent employees in 2020.
Businesses cannot have over 500 full-time employees in 2021.
Startup businesses must apply using the qualified wages paid to employees during these tax years. For each eligible quarter, business owners can use health plan expenses in addition to salaries and other wages. This only applies to full-time employees (FTEs) who have worked over 30 hours per week.
How Much Can a Recovery Startup Business Claim?
A recovery startup business can claim up to $7,000 per employee per quarter, with a maximum tax credit of $50,000 for the third and fourth quarters. That means, if you have eight full-time employees, you could earn up to $56,000 for a single quarter. If you have eight full-time employees in quarter two and six full-time employees in quarter three and four, you could earn $140,000!
The ERC is a refundable tax credit. Some startups may receive more than they owed in that tax year. That means they will receive the rest of the remaining balance as a refund that could be used towards paying wages, business expenses, and more. A lot of businesses were required to add things like outdoor patios and glass walls in their business to protect from COVID-19. This tax credit can help offset some of those expenses.
Recovery Startup Businesses ERTC for the 2021 Tax Year
Unlike other businesses, qualifying recovery startup businesses can also apply for the ERC tax credit for the third and fourth quarters of 2021. This tax credit is only eligible for employers who otherwise did not meet the eligibility criteria of having either full or partial suspension of business operations or a significant decline in gross receipts.
Businesses who qualify for the third and fourth quarters of 2021 cannot exceed $1 million in annual gross receipts for the 3-taxable-year period. This period ends with the tax year that precedes the calendar quarter in which they are eligible for the credit. For example, if they are eligible in the fourth quarter of 2021, the period ends with the 2022 tax year.
How to Apply for the ERTC
To apply for the ERTC, startup businesses need to complete an application to submit to the IRS. It is best to hire an ERC consultant to help you complete your application to ensure that you meet proper criteria for the tax quarters in which you are applying. An ERC consultant can also get you in line faster with the IRS to ensure that all you are waiting on is their approval before receiving your credit. Because of delays with the IRS, receiving your ERC refund could take longer, so you should apply as soon as possible.