While businesses can no longer pay wages to claim the federal Employee Retention Credit (ERC), they have until 2024 to look back on their payroll throughout the pandemic and claim the credit retroactively.
The ERC program may have ended, but that doesn’t mean businesses can’t still claim the credit — wages a business paid after March 12, 2020, until the end of the program are still eligible.
While various employers qualify for the ERC, we’re going to discuss how recovery startup businesses (RSBs) specifically can claim this tax credit.
Related: What Is the ERC?
A Brief Introduction to the Employee Retention Credit
The Employee Retention Credit is a helpful tax credit that many businesses can claim on their qualified wages paid to employees, specific health insurance costs, etc.
The CARES Act (2020), Consolidated Appropriations Act (2021), and American Rescue Plan Act (2021) allow qualified employers to claim this credit.
Businesses may qualify if they:
- Were suspended or operated at reduced hours due to a government order
- Saw a significant decline in their gross receipts
- Qualify as a Recovery Startup Business
If you want to go more in-depth about the Employee Retention Credit, we cover it in detail here.
Does your Recovery Startup Business qualify for the ERC? Find out with your free consultation from our ERC tax experts.
Determine If Your Recovery Startup Business Qualifies for the ERC
There’s a different set of criteria to qualify for the ERC as a Recovery Startup Business compared to the regular requirements.
RSBs must meet the following rules:
- It began conducting business or carrying on a trade after February 15, 2020.
Typically, taxpayers haven’t begun conducting business or carrying on a trade until their business begins functioning and performing the activities that it was organized for (generally, when their expenses are deductible and there is regular activity focusing on making a profit).
So a business in the preparatory or initial stages before February 15, 2020, can still qualify as a Recovery Startup Business if it did not deduct expenses incurred and conduct profit-making activities before the deadline.
- The average of its annual gross receipts for the last three tax years (ending with the year before the calendar quarter for which the ERC is determined) is at most $1 million.
Because of the first requirement, you’re probably wondering how this one fits in — RSBs will not have three years of gross receipts because they didn’t begin business until after February 15, 2020. Plus, RSBs with calendar year-ends won’t even have a full year of tax returns preceding Q3 and Q4 2021 — when the ERC is determined is limited to February 16 to December 21, 2020.
So how does this requirement apply to Recovery Startup Businesses?
Their gross receipts of less than 12 months for any taxable year get annualized by multiplying the total receipts over a short period by 12 and dividing that result by how many months were in that short period.
Related: Tax Credits for Hiring Veterans
If that sounds confusing, look at this simplified example:
Let’s say that a Recovery Startup Business has gross receipts from June 1, 2020, to December 31, 2020 — seven months — that total $300,000. To calculate its annualized gross recipes, we need to multiply $300,000 by 12 and divide by seven: ($300,000*12 months)/7 months = $514,286.
Because that number is under $1,000,000, the RSB in our example would pass this requirement.
- It’s not eligible for the Employee Retention Credit under another category.
A business cannot be an RSB if they are already an employer eligible for ERC because of a decline in gross receipts or suspension of operations. This requirement ensures taxpayers can’t claim the ERC twice for the same wages.
However, this requirement is not an issue for RSBs for Q4 2021— the Infrastructure Investment and Jobs Act made it so that taxpayers in that quarter could not qualify for ERC due to a decline in gross receipts or suspension of business. Therefore, only RSBs can be eligible for the credit in Q4 2021 by qualifying as an RSB through the first two requirements.
This rule does apply to every business for each quarter prior to Q4 2021.
The ERC for eligible employers that qualify as RSBs can not exceed $50,000 for any calendar quarter, and they can claim the credit for wages paid between June 30, 2021, and January 1, 2022.
How Can Recovery Startup Businesses Claim the ERC for Qualified Wages?
Eligible RSBs must report their total qualified wages for each calendar quarter (usually using IRS Form 941 — the Employer’s Quarterly Federal Tax Return). This is also the time to report qualified family leave and sick leave wages for which RSBs are entitled to a credit from the FFCRA.
Eligible RSBs can fund qualified wages in anticipation of receiving the ERC by:
- Accessing their federal employment taxes and withheld taxes deposited to the IRS
- Requesting an advance of the ERC from the IRS for the amount not funded by number one. You can do this by filing Form 7200 — Advance Payment of Employer Credits.
Claim your ERC the easy way — with our experts at TaxRobot.
Claiming Your ERC as an RSB Doesn’t Have to Be Difficult
If you’re a Recovery Startup Business that hasn’t claimed its Employee Retention Credit and began operating for profit after February 15, 2020, we recommend examining your gross receipts to see if you meet the requirements we discussed above.
However, if you’re not sure if you qualify, don’t have experience with taxes, or want to ensure you get the maximum amount out of your ERC, there’s an easier solution: Working with us at TaxRobot.
We help Recovery Startup Businesses file for their ERC to maximize their benefits and reduce their audit risk. We strive to make the process as straightforward as possible and provide a free defense in the case of an audit.
Related: What Is the WOTC?
Our ERC tax experts developed a simple three-step process to help you claim your credit in less time and with more accuracy — it’s as simple as:
- Providing your business’s information
- Filing your forms
- Receiving your refund
Click here to talk to an expert and start working on filing for your maximum ERC refund.