Recovery Start-up Business: Employee Retention Tax Credit
Employers have a once-in-a-lifetime opportunity to take advantage of the Employee Retention Tax Credit, but it can be very confusing. This tax credit was shaped through numerous legislative sessions, and when it was established, its guidelines were revised a few times. The government experimented with the eligibility requirements, the credit amount, and other factors. Additionally, they established unique regulations for newly founded companies in general and recovery start-up companies in particular.
While other businesses must use 2019 revenue figures, new enterprises can use 2020 revenue figures. They can do this to establish their eligibility for this incentive. Even if they wouldn’t typically qualify, businesses that qualify as recovery start-ups can apply for this credit in the second half of 2022.
Don’t be intimidated by this credit’s complexity. You can learn more about this credit and see if you qualify from some experts. This article examines the specific ERTC regulations for recovery start-up enterprises. Describing which businesses fall under this category and what they must do to be eligible for the credit in 2020 and 2021. The value of this credit is then described, together with advice on how to apply, in the handbook.
What Exactly Is a Recovery Start-up Company?
Any company that was founded after February 15, 2020, qualifies as a recovery start-up. The three-year tax period ending with the tax year before the quarter for which the credit is being claimed must also have average annual gross receipts of less than $1 million.
The first qualification requirement is simple. If you opened after that day, you are eligible. If you opened before that time, you are not eligible. More ambiguity exists in the second criterion. Here is a justification.
The recovery start-up regulations take effect in the third and fourth quarters of 2021. And a company that only began operations in 2020 won’t have three years’ worth of gross receipts by then.
By looking at their overall sales in 2020, these companies should determine if they fall below the $1 million revenue threshold. The result should be divided by the number of months they were in business after being multiplied by 12 and divided by that number. Here’s an illustration. Let’s imagine that on April 1st, 2020, a recovery start-up business opened. This indicates that they operated for nine months. For 2020, their revenue was $500,000.
By dividing by nine and multiplying $500,000 by 12, they may annualize their revenue. As a result, they have an annual revenue of $666,666.67. Which is less than the cutoff and qualifies them as a recovery start-up company.
Rules for Recovery Start-Up Businesses
Recovery start-up firms are in a special situation. For 2020 and the first part of 2021, they are subject to slightly different regulations than other enterprises. Additionally, these companies are eligible for special rules in the second half of 2021.
2020 ERTC for Start-Up Businesses in Recovery
If a company’s quarterly revenue was significantly lower than its quarterly revenue for the same quarter in 2019, it may be eligible for the ERTC in 2020. Of course, since they weren’t operating in 2019, recovering start-up enterprises are exempt from this requirement.
However, if these enterprises had a full or partial halt to operations as a result of COVID, they may be eligible for 2020 employee retention tax credits. Because of this, businesses that apply for the 2020 ERTC don’t need to follow any particular recovery start-up guidelines. Instead, they should follow the same procedure as other businesses. The last part of this series discusses the application process.
ERTC for Recovery Start-Up Businesses in Q1 and Q2 of 2021
In the first and second quarters of 2021, there are two distinct ways for recovery start-up enterprises to be eligible for the ERTC. They can either cite a drop in gross sales to demonstrate that they experienced a full or partial suspension of activities as a result of COVID.
Firms that weren’t in operation in 2019 can use their 2020 revenue numbers as a comparison. While the majority of businesses must compare their 2021 revenue statistics to their 2019 revenue data. If a company’s revenue in these quarters was 80% or less of the revenue in the comparison quarter, it would be eligible for the ERTC.
If your company had more than 500 full-time employees in 2019, you cannot be eligible for the ERTC in 2021. Unless you paid pay to people who were not working. For this rule, recovery start-up firms should use their 2020 employee numbers. Firms don’t need to mention that they are recovery start-up businesses if they are eligible to claim staff retention credits in these 2021 quarters.
ERTC for Recovery Start-up Businesses in Q3 2021
For the first six quarters that the government offered the ERTC, your recovery start-up business must meet the same qualifying standards as every other type of company. The alterations were rather minor, as previously mentioned. However, a new set of specific rules for start-up enterprises in the recovery will be implemented in the third quarter of 2021.
Based on the same guidelines provided for the first two quarters of 2021, you can be eligible for the ERTC in this quarter. This means that you can be eligible if your gross sales have decreased. Or if the COVID epidemic has caused a full or partial stoppage of operations. Because they are recovering start-up firms, new companies that do not meet either of these criteria may still be eligible.
ERTC for Recovery Start-Up Businesses in Q4 2021
This quarter, the ERTC is only available to recovering start-up firms. Any business that met the requirements in the initial version of the bill could have claimed credits for this quarter. But that was amended. Firms that fulfill the criteria for recovery start-up businesses do not need to demonstrate a drop in gross receipts or a stoppage of activities for this quarter to qualify.
Upper Limit of the ERTC
The value of the qualifying wages you paid and the quarter in which you make your credit claim affect the credit’s maximum amount. There are also special restrictions if you apply as a start-up business in recovery. 2020’s ERTC cap is $5,000 per employee for the entire year. For 2021, the credit’s maximum amount is $7,000 per employee per quarter.
However, regardless of the number of qualifying wages paid, businesses that claim the credit as a recovery start-up business can only claim a maximum of $50,000 every quarter.
Businesses must make sure they are taking full use of the tax credit for employee retention. That entails making the most of the particular regulations for start-up firms in recovery. Additionally, if you qualify due to a drop in revenue or a halt in operations, you must apply the standard guidelines for the third quarter of 2021.
Apply Right Away
We assist companies in various situations with ERTC applications! And we ensure that each of our clients receives the maximum amount of credit. Don’t let this fantastic chance pass you by. For assistance, get in touch with us or start an online application right away.