Key Takeaways:
- Businesses that opened after February 15, 2020, have special rules for the ERTC.
- These new businesses can qualify as recovery start-up businesses if they had less than $1 million in average annual revenue.
- Recovery start-up businesses can qualify for the ERTC without a decline in gross receipts or a suspension of operations for the second half of 2021.
- These are the only businesses that can qualify for the credit during the fourth credit of 2021.
- Businesses that claim the ERTC as recovery start-up businesses can only claim up to $50,000 per quarter.
- They can use the credits’ usual limits if they qualify based on a decline in gross receipts or a suspension of operations for the third quarter.
- Businesses should work with a specialist if they want to maximize this credit.
The Employee Retention Tax Credit is an exciting once-in-a-lifetime tax credit for employers, but it can be very confusing. Multiple rounds of legislation shaped this tax credit, and its rules changed a few times after its inception. The government played with qualifying criteria, the value of the credit, and more. They also created special rules for new businesses in general and recovery start-up businesses in particular.
New businesses can use 2020 revenue numbers to determine their eligibility for this credit when other businesses have to use 2019 numbers. Businesses that qualify as recovery start-ups can claim this credit during the second half of 2021, even if they wouldn’t ordinarily qualify. Recovery start-up businesses are also the only businesses that can claim this credit for the last quarter of 2021.
Don’t let the complexity of this credit intimidate you. There are specialists who can help you understand this credit and whether you qualify. This guide looks at the special ERTC rules for recovery start-up businesses, explaining which companies qualify as recovery start-up businesses and what they need to do to qualify for the credit in 2020 and 2021. The guide then outlines the value of this credit and provides tips on how to apply.
What Is a Recovery Start-Up Business?
A recovery start-up business is a business that started after February 15, 2020. It also must have average annual gross receipts under $1 million for the three-year taxable period ending with the taxable year that precedes the quarter for which the credit is being claimed.
The first qualification rule is straightforward. You qualify if you opened after that date. You don’t qualify if you opened before that date. The second criterion is more confusing. Here is an explanation.
The recovery start-up rules really come into play during the third and fourth quarters of 2021, and clearly, a business that only opened in 2020 doesn’t have three years of gross receipts at the end of 2021. There is a standard way to calculate this, luckily.
These businesses should check if they are under the $1 million revenue mark by looking at their total revenue in 2020. They should then multiply that number by 12 and divide the result by the number of months they were in business. Here is an example. Say that a recovery start-up business opened on April 1, 2020. This means they were open for nine months. Their revenue for 2020 was $500,000.
They can annualize their revenue by multiplying $500,000 by 12 and dividing by nine. That makes their annual revenue $666,666.67, which is under the threshold, so they qualify as a recovery start-up business.
ERTC Rules for Recovery Start Up Business
Recovery start-up businesses are in a unique situation regarding the ERTC. They have slightly different rules than other businesses for 2020 and the first half of 2021. These businesses also qualify for special rules during the second half of 2021. Take a look at the specifics broken down by period.
2020 ERTC for Recovery Start-Up Businesses
Businesses can qualify for the ERTC in 2020 if their quarterly revenue was substantially less than their revenue for the same quarter in 2019. This rule, of course, can’t apply to recovery start-up businesses because they weren’t in operation in 2019.
These businesses, however, can qualify for 2020 employee retention tax credits if they experienced a full or partial suspension of operations due to COVID. Companies that apply for the 2020 ERTC for this reason don’t have to apply under any special recovery start-up rules; they should use the same process as any other company. The application process is covered in the final section of this post.
Q1 and Q2 2021 ERTC for Recovery Start-Up Businesses
Recovery start-up businesses can qualify for the ERTC in the first and second quarters of 2021 in two different ways. They can show that they experienced a full or partial suspension of operations due to COVID, or they can use a decline in gross receipts.
Most businesses must compare their 2021 revenue numbers to their 2019 revenue numbers, but companies that weren’t open in 2019 can use their 2020 revenue numbers as a comparison. Businesses would qualify for the ERTC in these quarters if their revenue was 80% or less than the revenue from the comparison quarter.
You can’t qualify for the ERTC in 2021 if your business had more than 500 full-time employees in 2019 unless you paid wages to employees who were not working. Recovery start-up businesses should use their 2020 employee numbers for this rule. Businesses that qualify to claim employee retention credits in these quarters of 2021 don’t need to note that they are recovery start-up businesses.
Q3 2021 ERTC for Recovery Start-up Businesses
Your recovery start-up business has similar qualification rules as any other business for the first six quarters during which the government offered the ERTC. The differences, as explained above, were relatively small. Quarter three of 2021, however, brings in a new set of specific rules for recovery start-up businesses.
You can qualify for the ERTC in this quarter based on the same rules outlined for the first two quarters of 2021. That means you can qualify based on a decline in gross receipts or a full or partial suspension of operations due to the COVID pandemic. New businesses that don’t qualify based on either of these conditions can qualify because they’re a recovery start-up business.
Q4 2021 ERTC for Recovery Start-Up Businesses
Only recovery start-up businesses can claim the ERTC during this quarter. An original version of the law allowed any business that qualified to claim credits in this quarter, but that was changed. Businesses that qualify as recovery start-up businesses don’t have to show a decline in gross receipts or a suspension of operations for this quarter; they qualify simply based on meeting the definition of a recovery start-up business.
Maximum Value of the ERTC
The maximum amount of the credit varies based on the value of the qualifying wages you paid and the quarter in which you claim the credit. There are also specific limits if you apply as a recovery start-up business. The maximum ERTC for 2020 is $5,000 per employee for the year. The maximum credit for 2021 is $7,000 per employee per quarter.
Businesses that claim the credit as a recovery start-up business, however, can only claim a maximum of $50,000 per quarter, regardless of how much they have paid in qualifying wages.
Businesses need to ensure they’re maximizing their potential employee retention tax credit. That means taking full advantage of the special rules for recovery start-up businesses. It also means applying under the traditional rules for quarter three of 2021 if you qualify based on a decline in revenue or a suspension of operations.
Value of the ERTC for Recovery Start-Up Businesses
You now know how new businesses can qualify for the employee retention tax credit. You may still wonder how much money you can get and how to apply for this credit. Here is a look at how this credit is calculated, its limits, and the deadline for claiming it.
Value of the ERTC
The value of the ERTC depends on how much you paid your employees. The ERTC is 50% of qualifying wages up to $10,000 for 2021. This means that you can get up to $5,000 per employee for the year. The credit is worth up to 70% of qualifying wages up to $10,000 for every quarter of 2021. This means that you may be able to get up to $28,000 per employee for 2021.
ERTC Limits for Recovery Start-Up Businesses
Recovery start-up businesses cannot claim more than $50,000 in credits per quarter. This rule comes into play for the last two quarters. You can only claim up to $50,000 in credits for the fourth quarter. The limit for the third quarter depends on how you qualify for the credit.
You can claim up to $7,000 per employee if you qualify based on a decline in gross receipts or a suspension of operations. The credit is capped at $50,000 for the quarter, however, if you apply based on being a recovery start-up business.
How to Apply for the ERTC
Applying for the ERTC requires you to amend your employment tax returns. Here is what you need to do: Look at the criteria to determine if your business qualifies for the ERTC for any quarter of 2020 or 2021. Then find the employer payroll tax return you filed for that quarter and file a 941-X to amend that tax return.
Deadline for the ERTC
The deadline for recovery start-up businesses to claim the ERTC varies based on which quarter they’re claiming the credit. The IRS allows you to amend any tax return for a refund within three years after the due date of the return. This means you have three years from the original due date of the return to file an amended return to claim this credit.
There is also an alternative deadline, but this generally only comes into play in situations when you have paid your tax bill late. The alternative deadline is that you can claim a refund within two years after you paid the tax. The deadline that applies is the latter of the two.
Here is an example. Say that you filed your second quarter 2020 payroll tax return on time on July 31, 2020. You don’t end up paying the tax until almost a year and a half later, on September 15, 2021. The deadline to submit an amended return based on your filing deadline is July 31, 2023, but the deadline based on when you made your payment is September 15, 2023. Your late payment may have caused you to incur some penalties, but in this situation, it also buys you some extra time to claim your ERTC credit.
Claiming the ERTC credit is relatively straightforward in theory. You simply amend your old payroll tax returns. The process can be a lot more complicated in practice, however. This isn’t something you can jump on consumer-grade tax prep software to take care of. It’s also not something most bookkeepers or accountants are ready to handle – the novelty and complexity of this credit make it confusing even for experienced tax professionals.
New businesses that want to maximize this credit should reach out to a specialist. There are companies formed just to help employers obtain this credit. These specialists can also help you navigate the particular rules for recovery start-up businesses and help ensure you get the maximum credit possible.
Apply for the Recovery Start-Up Business ERTC with ERC Today
ERC Today was founded with the sole intention of helping businesses claim this valuable credit. We help businesses in a wide range of situations to apply for the ERTC, and we ensure that all our clients get the maximum credit possible. Don’t miss out on this incredible opportunity. Contact us for help, or start the application process online today.
