Are You a Recovery Startup Business Eligible for the Employee Retention Tax Credit?
Startup companies that were brave enough to launch during the COVID-19 pandemic may finally have something to celebrate: a government-sponsored influx of cash directed specifically toward startups. Thanks to the passage of the American Rescue Plan Act (ARPA) of 2021, companies that launched just before and during the pandemic may be eligible for the Employee Retention Tax Credit (ERTC).
How Does ARPA Benefit Startups?
During COVID, many existing businesses qualified for governmental relief programs, such as the ERTC. However, new businesses missed out because they couldn’t show that they lost revenue or were shut down due to the pandemic. That changed in 2021. ARPA was passed by the federal government to ease the economic burden that COVID-19 wreaked on small businesses, particularly those trying to launch under such difficult circumstances. Part of this legislation introduced a new way to qualify for the ERTC for “Recovery Startup Businesses” founded after February 15th, 2020. The law created separate and arguably simpler eligibility rules for such businesses compared to companies existing before COVID. As a result, qualifying startups can see significant money to help their business.
How Can You Qualify As a Recovery Startup Business?
There are three requirements to qualify as a Recovery Startup Business. The first one is based on when your business started. Under IRS rules, a business must have begun carrying on a trade or business on or after February 15, 2020, pretty much right when the pandemic started. However, it’s important to note that it is not enough to just launch a business; an entity has not begun to carry on a trade or business until it has conducted regular activities geared toward making a profit. This would also allow companies who “launched” their business before February 15, 2020, to be eligible if they had not conducted activities towards profit until after February 15, 2020.
Second, you must satisfy the “gross receipts test.” The IRS requires that a Recovery Startup Business have average gross receipts below $1,000,000 for their first taxable year. Most small startups fall well below this threshold but there are certainly outliers. It is crucial to consult a professional to ensure you meet this qualification because the gross receipts analysis can be complex, depending on the circumstances. Additionally, If there are other companies with the same owner, for the 3-taxable year period preceding the inception of the new company (2018-2020), the combined average annual gross receipts of all owned companies must be less than $1,000,000.
Accordingly, if you started your company post-February 15, 2020, generated under $1,000,000 in gross receipts, and didn’t suffer government-mandated restrictive measures, you can qualify for the ERTC as a Recovery Startup Business.
However, if you own other businesses or you are an investor in other ventures, an analysis should be done by a professional to determine whether that may disqualify your company as a Recovery Startup Business.
How Much Money Can a Recovery Startup Business Get Under the ERTC?
Qualifying Recovery Startup Businesses can claim a tax credit of up to $7,000 per worker, per quarter for wages paid after June 30, 2021, and before January 1, 2022. They can get as much as $50,000 for Q3 and $50,000 for Q4 of 2021, a huge benefit for small, growing businesses.
Additionally, if a business would be eligible under the criteria that apply to regular businesses (partial suspension or revenue reduction) and still want to qualify as a Recovery Startup Business, they are not allowed to claim more than $100,000 in total.
While the ERTC rules are somewhat simpler for Recovery Startup Businesses, there are still several confusing issues that can disqualify a business or delay receipt of the money if proper documentation is not provided. It is best to consult a professional for assistance. Note that even if you have already filed your quarterly returns, you can amend your return to get the credit.
Funding Forward is highly experienced in helping businesses apply for the ERTC program, having assisted 13,000+ businesses secure over $1 billion. Contact us today for a consultation.