Even with Covid-19 running rampant, 4.4 million new companies began operations in 2020. That same year, 77% of startup founders said they were facing failure due to the pandemic. Small businesses in the U.S. employ 47.3% of the private workforce.
Before Covid, about 37% of startups opening between 2000 and 2020 went out of business. The reason—they ran out of capital. Recognizing the importance of these small companies and the impact of Covid-19 on the workforce, the government enacted the Employee Retention Credit Act (ERC).
What is the Employee Retention Credit? It is a refundable tax credit for startups and long-standing businesses suffering financial impact from Covid-19. It’s not a loan, it’s a tax credit that does not have to be paid back.
If you are a recovery startup business for the employee retention credit, you receive special consideration for eligibility. Read on to learn the ten misunderstandings relating to ERC for new business started in 2020 to today.
What Is a Recovery Startup Business?
The term “recovery startup business” is applicable to any business that:
- Began operating as a business after February 15, 2020, and
- Annual gross receipts averaging $1,000,000 or less, and
- Employs one (1) or more employees, and
- Does not qualify as eligible using other criteria
If you meet the above requirements, you qualify for ERC. Recovery startups have a different recovery amount than standard small businesses.
A recovery startup may claim a maximum credit of $50,000 per quarter for Q3 and Q4 of 2021. Qualifying wages include amounts paid for group health care.
1. ERC a Recovery Startup Business Can Get
Your startup business can save up to $7,000 per qualifying employee per quarter. The total savings for a startup is capped at $50,000 per quarter.
Depending on the total number of employees you have and their wages, you have a potential recovery of $50,000 per quarter. You have two quarters to apply for this credit. If you max it out in both Q3 and Q4 in 2021, you may receive $100,000 in payroll tax credit.
If you haven’t claimed this credit, get in touch with ERC Today and apply for employee retention credit before the deadline.
2. You Can Claim ERC if You Have PPP Loans
When Congress enacted the Consolidated Appropriations Act (CAA) of 2021 it abolished prior restrictions. Before that time businesses were only able to participate in the Payroll Protection Program (PPP) or ERC. The CAA makes it possible to apply for both.
A PPP loan only takes into consideration 2-1/2 times your monthly payroll expenses. The loan is designed to be spread out over a six-month period. That leaves a lot of unclaimed wage expenses you can recover by applying for ERC.
3. You Do Not Need a 50% Reduction
The original qualification of a 50% reduction in receipts between 2019 to 2020 no longer exists. You can now qualify with a 20% reduction in receipts.
The qualifying percentages vary from 20% to 90% depending on the quarter. There are other factors that affect the ability to collect ERC, including making sure that the claims cover only qualifying employee wages.
4. You Can Qualify With a Partial Shutdown
Many business owners believe they don’t qualify unless their business was completely shut down during the pandemic. Your business may qualify if it was subject to a partial suspension order from your local, state, or federal government.
Situations that may qualify you for ERC relief include:
- Partial shutdown
- Disruption to business
- Unable to access equipment
- Limited capacity
- Supply chain shutodown
- Vendor shutdown
- Reduction in services
- Reduction in hours to accommodation sanitation requirements
- Shutting down of some locations
Did the government cause your business to experience a partial or full suspension? If that mandatory government suspension made your business unable to continue its full, normal activities, substantially impacting business operations, you qualify.
5. Essential Businesses Can’t Qualify
Even essential businesses suffer the impact of the pandemic. Perhaps you are open as an essential business, but your vendors are unable to deliver your supplies. Maybe you need to visit a client’s job site, but shutdown orders prevent you from completing that task.
These are scenarios that may qualify your company for ERC. You may also have a business where part of it remains open as essential, and another part is shutdown under government order.
6. Will the ERC Cause an Audit?
Your business accepting tax credits it qualifies for has no impact on whether the IRS selects you for an audit. The only reason you may hear higher numbers for audits of those accepting payroll tax credits is that so many businesses have not taken the IRS employee retention credit due to them. Fewer numbers of filers increase the percentages for audits.
If you keep accurate records and retain all supporting documentation, you have no concerns. The benefit of potentially getting $100,000 in tax credits outweighs the risk of an audit.
7. Sales Recovery Disqualification
If your sales recover for the first quarter of 2021, you can still qualify for credit. There is an option of looking back one-quarter prior when making a qualification determination.
To qualify, a review of lost revenue in 2020 is given consideration. Any full or partial suspensions are also given qualifying factors.
If your business grew during the pandemic, you may still be eligible for tax credits. You are not penalized from receiving a tax credit if you incur a partial or full government suspension.
8. My Tax Accountant/Payroll Service/CPA Took the Credit on My Annual Tax Return
Your CPA can be the best in the state, but they did not take the employee retention credit on your annual tax return. The credit is only available on Form 941, or by filing a Form 941X. The ERC is not part of your annual income tax return.
9. More Than 500 Employees Disqualifies My Business
The employee count uses the basis of a full time equivalent (FTE) worker. You need to consider the individual status of every employee, not just take a head count.
Any employees you paid wages to for not working, or for working less than the wage they received, don’t count under FTE.
10. Does Acquisition of an Existing Business Qualify as a Startup?
If you open a new store, that qualifies as a startup. What if you purchase a restaurant or store that is already operating? The answer—that business is new to you, so you qualify.
The description Congress gave for a recovery startup business was an employer that began operating a trade of business after February 15, 2020. If you took over the business, you are a new employer.
Why You Need an ERC Professional
The employee retention credit provides you with the opportunity to recover thousands of dollars for employee payroll expenses. Since the CARES Act went into effect, there have been numerous chances to the law. Each change expands the ability to collect and makes more businesses eligible.
To apply or amend your filings, you must use the proper forms. The correct form depends on what step in the process your business is at.
There is a three-year lookback period. You don’t want to miss the deadline or have a return not processed because you missed a step or made a mistake.
Learn where your business stands on qualifying for employee retention tax credit or a Paycheck Protection Program (PPP) loan.
File for Employee Retention Credit
At ERC Today we specialize in applications and amendments for the Paycheck Protection Program and the Employee Retention Credit. If you have questions, concerns, or believe you need to amend your filings, contact ERC Today.
We will review your records and assist you in recovering any tax credits you may be due.
Learn more about Recovery Startup Business Tax Credits
Frequently Asked Questions (FAQs) about the Employee Retention Credit for Startups
The Employee Retention Credit is a tax credit introduced to help businesses, including startups, retain their employees during challenging economic times, such as the COVID-19 pandemic. It provides eligible businesses with a refundable credit against their payroll taxes, aiding them in maintaining their workforce.
What is a recovery startup business for ERC?
A “recovery startup business” for ERC is a startup founded after February 15th, 2020, eligible to claim the Employee Retention Credit (ERC) for financial recovery during challenging economic times like COVID-19. The ERC is a tax credit that helps businesses retain employees and support their recovery.
Can startups claim both the ERC and the Paycheck Protection Program (PPP) loan simultaneously?
No, a business cannot claim both the ERC and the PPP loan for the same wages. If a startup received a PPP loan, they are ineligible to claim the ERC on wages paid with the proceeds of the PPP loan.
Yes, there are limitations. Businesses with over 500 full-time employees may not claim the ERC for wages paid to employees who are still working. However, startups experiencing significant revenue reduction due to COVID-19 can claim the ERC even if they have more than 500 employees.
No, startups cannot claim the ERC retroactively for wages paid before January 1, 2020. The ERC provisions were introduced as part of the CARES Act, effective from 2020, and do not apply to wages paid prior to that date.
No, it’s not mandatory for startups to experience a full or partial suspension of operations to claim the ERC. Businesses can still qualify for the credit even if they haven’t faced a government-mandated shutdown if they meet the criteria for significant revenue reduction.
Receiving other forms of government assistance, like state grants or disaster relief funds, does not disqualify startups from claiming the Employee Retention Credit. However, businesses must ensure that the same wages are not used for multiple credit programs.
Yes, it is crucial for startups to maintain proper documentation to support their ERC claims. The Internal Revenue Service (IRS) may request documentation and records to verify the eligibility of startups for the credit.
The availability of the Employee Retention Credit for startups is time-limited. The ERC was initially set to expire at the end of 2020, but it was extended several times through legislation. Businesses need to stay updated on any new extensions or changes to the ERC’s availability beyond the current year.