The landscape of our work, shopping, lifestyle, and education has undergone a profound transformation due to the impact of the Covid-19 pandemic. This unprecedented situation has presented businesses with a whole new array of obstacles to overcome.
From complying with safety regulations to managing logistical complications and ensuring profitability, today’s business owners face a multitude of challenges. However, amidst these difficulties, a wave of fresh startups is emerging across the nation, demonstrating resilience and adaptability in the face of adversity.
If you established your business after February 15, 2020, you might qualify for the Employee Retention Credit (ERC), a valuable tax credit designed to support eligible “recovery startup businesses.”
If you have questions about your eligibility for tax credits, we are here to assist you! Let’s explore how the ERC can provide substantial assistance to your business.
Understanding the Employee Retention Credit
The Employee Retention Credit (ERC or ERTC) is a refundable tax credit provided by the IRS, calculated based on a percentage of the wages that qualify for your employees. Its purpose is to offer support to business owners during the economic challenges posed by the Covid-19 pandemic.
Enacted as part of the CARES Act in 2020, alongside initiatives like the PPP (Paycheck Protection Program) and Economic Injury Disaster Loans (EIDL), the ERC stands out as a particularly favorable option for business owners.
What sets it apart? Unlike the PPP and EIDL, the ERC does not necessitate repayment or impose specific spending requirements on business owners. It offers greater flexibility and freedom in utilizing the funds received.
ERTC Eligibility for Recovery Startup Businesses
According to the provisions set forth in the American Rescue Plan Act, businesses established amidst the Covid-19 pandemic have the potential to qualify for the Employee Retention Credit (ERC). To determine if you are an eligible Recovery Startup Business for ERTC, the following criteria must be met:
– Commencement of business operations on or after February 15, 2020
– Annual gross receipts that do not surpass $1 million
– Employment of one or more individuals
Does My Business Fit The Description?
If you’re uncertain about whether your business meets the eligibility requirements as a Recovery Startup Business, consider the following factors:
– Employment: Your business must have a minimum number of employees.
– Start Date: The business should have been established on or after February 15, 2020.
– Annual Gross Profits: The total annual gross profits must not exceed $1 million for each of the three previous years.
– Exclusivity: Your business should not be eligible under any other criteria.
– Employee Payments: Payments to employees must have been made during the third and fourth quarters of 2021.
– Tax Exemption: The business should not be registered as “tax-exempt” with the IRS.
– Operational Impact: Business operations must have experienced either partial or full suspension due to governmental requirements.
– Significant Decline: Gross sales should have shown a significant decline.
Info for New Business Startup Owners
For entrepreneurs who launched their businesses in the second quarter of 2021, it’s important to note that you won’t be able to claim any credits for the entirety of 2020 or the first two quarters of 2021. However, there is still a possibility of being eligible for credits pertaining to earlier quarters if your business meets specific criteria set by the government, such as complying with restrictions or experiencing a reduction in revenue. ERC for new business started in 2021 and ERC for new business started in 2020 have different criteria.
If I Qualify, What Refund Amount Will I Receive?
When considering the extent of the Employee Retention Credit (ERC) that businesses can claim, the following guidelines apply:
Under normal circumstances, the credit amount will be 50% of the total wages paid between March 2020 and December 31, 2020. Each quarter has a wage limit of $10,000 per employee. In 2021, the ERC covers 70% of qualified wages paid to employees until September 2021. The quarterly limit remains at $10,000.
To put it into perspective, this means that each quarter you can receive up to $7,000 per employee, with a maximum credit of $21,000 per employee.
For businesses classified as recovery startups, the credit limit expands to $50,000 per quarter. Eligible wages include those paid until December 31, 2021, and the September 2021 limit no longer applies. To qualify, the business must have commenced operations after February 15, 2020, and have annual gross revenue not exceeding $1 million.
Determining Qualification of Wages
The qualification of wages depends on several factors to ensure eligibility for the Employee Retention Credit (ERC). Here’s what you need to consider:
Qualified wages encompass the compensation directly received by employees from the company, along with any other expenses related to health plans.
The determination of qualified wages also takes into account the number of employees working for the company in 2019. However, if the business was established in 2020, the assessment will be based on that specific year.
If health benefits are provided to non-working employees, they may be considered as qualified wages. The recognition of healthcare benefits as qualified wages is contingent upon the guidelines set by the insurance provider.
If you have concerns about healthcare costs as a qualifying factor, it is advisable to seek clarification from an ERC specialist who can provide expert guidance on the matter.
Updates for 2023
As we delve into the eligibility updates for the Employee Retention Credit (ERC) in 2023, it’s crucial to note the following criteria:
To be considered for the ERC, a significant portion of your business operations must have been suspended. According to the revised eligibility rules, a portion is deemed significant when it exceeds a nominal threshold.
Furthermore, the gross receipts derived from that suspended portion of operations should not be less than 10% of the overall gross receipts. Additionally, there should be a reduction of at least 10% in an employee’s service hours compared to the total hours worked by all employees.
The Process of Getting My ERC Tax Credit
Even though the program officially concluded in 2021, business owners can still claim the ERC. To access this credit, you can complete Form 941 when filing your federal taxes.
It’s worth noting that some businesses may be unaware of their eligibility for the credit. If you have received a PPP loan, you may still qualify for the ERC.
However, if your PPP loan has been approved for forgiveness, you cannot claim the credit for employee wages that were paid using those funds. On the other hand, if your loan forgiveness application has been denied, you can utilize wages paid from the PPP loan to claim the ERC.
If you have already filed your taxes and later realize that you are eligible for the ERC, don’t worry. It is still possible to apply retroactively by completing the Adjusted Employer’s Quarterly Federal Tax Return (Form 941-X).
Support and Services for Consideration
The Covid-19 pandemic has ushered in significant changes in our lives and work dynamics, causing severe impacts on business owners. In response, the government acknowledged the necessity of implementing the Employee Retention Credit.
If you haven’t yet claimed this credit, there is still a possibility of qualifying, particularly if you fall under the category of a recovery startup business. However, keeping up with the ever-changing rules and regulations can be confusing and overwhelming.
Rather than navigating the complexities and bureaucratic processes associated with claiming the credit on your own, seeking assistance from a tax professional can ensure that you receive the credit you deserve if you meet the eligibility criteria. Their expertise and guidance can streamline the process and maximize your chances of successfully obtaining the ERC.
Frequently Asked Questions
1. What is meant by a Recovery Startup Business?
A Recovery Startup Business refers to a business that was established shortly after the onset of the pandemic in 2020. It is characterized by having annual gross sales of less than $1 million for each of the three pandemic years.
2. How is eligibility determined for obtaining the Employee Retention Credit for a Recovery Startup Business?
To qualify for the ERC, a Recovery Startup Business must have experienced either partial or complete operational suspension due to government mandates related to the pandemic. Alternatively, a significant decline in sales can also make a business eligible for the credit.
3. What is the maximum amount that a business can claim for the ERC?
A Recovery Startup Business can claim a maximum of $50,000 from the ERC.
4. How is the Employee Retention Credit calculated?
The calculation of the ERC is straightforward. Each employee’s wages are eligible for a credit of $5,000 per quarter in 2020, with a maximum limit of $10,000. For 2021, the credit is 70% of qualified wages per quarter, also with a maximum limit of $10,000. This means that the maximum credit per employee for the year can reach $28,000.
5. What types of startup businesses can receive the ERTC?
For 2020, any employer with less than 100 employees can apply for the ERC. In 2021, businesses with fewer than 500 employees can apply. Large employers are defined as those with over 100 full-time employees in 2020 and over 500 in 2021.
6. Are there specific quarters that can be claimed?
The ERC amount is capped at a maximum of $50,000 per quarter. Therefore, the maximum claim for a Recovery Startup Business for all four quarters in 2021 can be up to $200,000.
7. How does code section 3134(c)(5)(A) define the Recovery Startup Business?
Code section 3134(c)(5)(A) defines the Recovery Startup Business as a business that commences operations after February 15, 2020, during the pandemic. The determination of the business start date follows the same rules as outlined in section 162 for determining the start of a trade or business.