Tax Credits

Recovery Startup Business Employee Retention Credit (June 2023)

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While the ERC was initially available to eligible employers, subsequent amendments have expanded its scope to include a unique category called “Recovery Startup Businesses.”

Below, we explore more about Recovery Startup Businesses and look into the specific provisions of the ERC that apply to these budding enterprises. We look into what qualifies a business as a Recovery Startup Business, the key distinctions in ERC eligibility, and how these businesses can maximize their benefits.

Furthermore, we will discuss the financial advantages of the ERC and the specific limitations that Recovery Startup Businesses need to be aware of.

Whether you’re a visionary entrepreneur or an investor curious about the incentives available to new ventures, understanding the nuances of the ERC for Recovery Startup Businesses can prove invaluable.

What Is The Employee Retention Credit?

The Employee Retention Credit (ERC) is a valuable tax incentive program introduced by the government to assist businesses in retaining their employees during challenging economic times. Originally implemented as part of the CARES Act, the ERC has undergone subsequent amendments to expand its reach and provide additional relief to eligible employers.

In simple terms, the ERC allows qualifying employers to claim a tax credit based on a percentage of qualified wages paid to their employees. This credit serves as a financial lifeline, helping businesses offset a portion of the wages paid and keep their workforce intact.

Employee Retention Credit Eligibility

  • Businesses can qualify for the Employee Retention Credit (ERC) based on two criteria:
    1. Full or partial suspension of operations due to COVID-19 restrictions imposed by a governmental authority.
    2. Significant decline in gross receipts during specific quarters.
  • To qualify for the suspension of operations, the business must have received orders limiting commerce, travel, or group meetings.
  • For the decline in gross receipts, the business should have experienced a decline of at least 50% compared to the same quarter in 2019 (for 2020 quarters) or a decline of 20% compared to the same quarter in 2019 (for 2021 quarters).
  • A separate category, called recovery startup business, applies to businesses that began operations after February 15, 2020, and meet specific gross receipts criteria.

Gain a more comprehensive understanding of the ERC and how it can benefit your business by checking out our article: Know more about the ERC.

ERC Recovery Startup Business Definition

The ERC underwent changes with the American Rescue Plan Act of 2021, extending eligibility to “recovery startup businesses” that would not meet the standard criteria. But what exactly defines a “recovery startup business”? The Internal Revenue Service, including its Bulletin No. 2021-34 among others, provides essential qualifications and definitions:

  1. To qualify as a recovery startup business, the employer must have initiated their trade or business after February 15, 2020.
    • If you acquired a pre-existing business that was operational on or before February 15, 2020, whether your business is classified as a startup or not would depend on the specific details. However, it would qualify under the other Employee Retention Credit (ERC) rules, such as the requirements related to business limitations and decline in revenue.
  2. The average annual gross receipts of the employer for the three taxable years preceding the calendar quarter in question should not exceed $1,000,000.
  3. The determination of when an employer “began carrying on a trade or business” follows the same principles as Section 162 of the Internal Revenue Code. Tax-exempt organizations under section 501(c) of the Code can also be considered recovery startup businesses for all their operations.
  4. Qualified wages, which are eligible for the employee retention credit, include wages paid by a recovery startup business.

The American Rescue Plan (ARP) brought about amendments to the Employee Retention Credit (ERC) to include recovery startup businesses that didn’t meet the standard eligibility criteria based on operational limitations or revenue decline.

However, with the introduction of the Infrastructure Investment and Jobs Act (IIJA), the requirement for the fourth calendar quarter, stating that a recovery startup business must not qualify as an eligible employer due to a suspension of operations or a decline in gross receipts, has been eliminated.

ERC Limitations For Recovery Startup Businesses

Nonetheless, there are certain limitations that recovery startup businesses need to be aware of. While these businesses can benefit from the ERC, it’s important to note that you cannot claim the recovery startup credit for any period in 2020. Additionally, you are not eligible to claim the credit for the first and second quarters of 2021.

How Much Will A Recovery Startup Business Get From The ERC?

For recovery startup businesses, the ERC can provide a significant financial boost. These brand-new businesses have the potential to receive up to $50,000 per calendar quarter through the ERC. It’s important to note that this credit is specifically applicable for the third and fourth quarters of 2021.

To put it into perspective, let’s consider an example. Imagine a recovery startup business that qualifies for the ERC in both Q3 and Q4 of 2021. In this scenario, the business can potentially receive a total credit of up to $100,000 ($50,000 for each quarter). This can be a valuable infusion of funds that can support the business during its initial stages of operation.

Summary

The Employee Retention Credit (ERC) is a powerful tool that offers financial relief to businesses, and recent amendments have expanded its reach to include recovery startup businesses. These new ventures can now tap into tax credits, potentially receiving up to $100,000 to support their growth.

The ERC provides a lifeline to businesses by offering significant benefits. It helps alleviate financial strains caused by the COVID-19 pandemic and supports employee retention. Recovery startup businesses, in particular, stand to gain from this credit, even if they do not meet traditional eligibility criteria such as full or partial suspension or a decline in gross receipts.

While there are limitations to consider, recovery startup businesses can still access substantial tax credits. By visiting the IRS website or consulting with a tax professional, businesses can determine their eligibility and unlock the potential benefits of the ERC. Don’t miss out on this opportunity to bolster your startup’s financial position and invest in its success.