Table of Contents:
Is your business under three years old? Did you experience government interruption or a decrease in revenue from the COVID-19 pandemic? While eligibility criteria is complex, your business may qualify as a recovery startup business under IRS guidelines and potentially qualify to receive a payroll tax refund.
The American Rescue Plan Act defines a recovery startup business as a business that opened its doors after February 15, 2020. By meeting this and other qualifications, your business may be eligible for the Employee Retention Credit (ERC), and as a qualifying recovery startup business, you may receive a tax credit.
What is the ERC?
What is the ERC? It’s a payroll tax refund that helps eligible businesses that, in part, kept employees on payroll during the pandemic.
It was developed to encourage and support employers who retained existing employees throughout 2020 and the first three quarters of 2021 by offering a generous payroll tax refund through the IRS.
It’s important to note that the original ERC has been modified several times. Originally, it was not accessible for businesses that took part in PPP funding. This means that many employers took out PPP loans in 2020 – but may have skipped the ERC based on outdated information.
What is an ERC Recovery Startup Business?
According to the IRS, a recovery startup business is “an employer that began carrying on a trade or business after February 15, 2020.”
The other criteria for an eligible recovery startup include:
a.) Your annual gross receipts don’t exceed $1 million for the individual 2020 and 2021 tax years.
b.) You have one or more W2 employees, not including owner-operators or family members.
For example, if you started a church or non-profit on April 1, 2020, and brought in $654,000 for tax years 2020 and 2021, you may be considered a candidate for the ERC. If you’re deemed a recovery startup, your business can receive an ERC credit per worker, per quarter.
The big question for many churches and nonprofits who wish to claim the ERC is whether they’re eligible. As a non-profit entity, some feel that they don’t qualify as “businesses” and therefore aren’t subject to the same tax credits.
However, churches and non-profits were subject to the same governmental restrictions as every other business, which impacted their ability to operate. Additionally, the ERC is credited through payroll taxes, so non-profit organizations are included in the package.
Put simply, if you kept employees on during COVID, you may be eligible.
Is the ERC Funding Program for New Businesses?
Yes, the ERC does apply to new businesses and is applicable for wages paid prior to January 1, 2022.
According to the IRS, a recovery startup can still claim the ERC for wages paid after June 30, 2021 and before January 1, 2022.
For example, if a church opened its doors after February 15, 2020 and kept employees on payroll throughout 2021, it may be eligible for ERC credits during those applicable tax quarters.
Qualifications for an ERC Recovery Startup Business
What are the qualifications for a Recovery Startup Business claiming the ERC?
You must not be eligible under any other ERC requirements, and you must have experienced either a full or partial suspension of operations due to government orders.
For example, churches and non-profits may have experienced this in the form of suspending or partially limiting operations, e.g. enforcing limited capacity, having to stop hosting live events, being mandated to use social distancing, and more.
#1: Your Business Started On or After February 15, 2020
The ERC was originally established as part of the CARES Act in 2020. But in 2021, the American Rescue Plan Act made changes to the ERC by extending it to “ERC recovery startup businesses.”
This means that any business that began operations on or after February 15, 2020 may be eligible, including tax-exempt organizations such as churches and nonprofits.
However, if you opened your business during the 2nd quarter of 2021, you won’t be eligible to claim credits for 2020 or the first two quarters of 2021.
#2: Your Business’ Gross Receipts Do Not Exceed $1 Million
A simple income qualification: To qualify for the ERC, your business' average annual gross receipts must be $1 million or less for the prior three tax years.
Another item of note: Typically, 501(c)3 organizations wouldn’t qualify for federal tax credits because they are considered “tax-exempt. ”However, thanks to the CARES Act, tax-exempt organizations may receive tax credits because the ERC is taken against employment taxes.
#3: Your Business Employs One or More W-2 Employees
To qualify for the payroll refund, your business must have one or more W-2 employees. Assuming you have more than one, it’s also important to note that the ERC is only for “small businesses” as defined by the IRS. What is their definition of a small business?
- For the tax year 2020, that’s 100 or fewer employees.
- For the tax year 2021, that’s 500 or fewer employees.
How Much Can My Recovery Startup Claim?
Qualified Wages in 2020: Up to 50% of $10,000 in employee wages and health plan costs, totaling $5,000 per employee per year.
Qualified Wages in 2021: Up to 70% of $10,000 in employee wages and health plan costs per quarter, totaling $21,000 per employee per year.
What could you use your ERC tax refund for?
With the ERC, qualifying organizations could receive a refund to help cover rising training costs, offer competitive employment incentives, expand services, and more.
For churches or non-profits, this might mean new equipment for live streaming events, retaining employees, investing in facilities or chapels – the possibilities are endless.
How Does a Recovery Startup Apply for Employee Retention Credit?
If you're a business owner who is looking to self-file your taxes, you might be overwhelmed by the ERC. It’s not an insurmountable task for the average taxpayer, but the requirements for filing the ERC can be complex and time-consuming. That’s why we recommend joining forces with an ERC company like Innovation Refunds to get your application started today.
Check your ERC eligibility with Innovation Refunds today.