Introduction
Due to the nature of the virus from the Covid 19 pandemic , the entire globe went into lockdown, and many aspects of our life, such as working, attending classes, and even shopping, changed from in-person to attending online.
This new digital lifestyle had a list of obstacles that were very new to us, and it took us a considerable amount of time to get used to.
Due to the extensive list of safety guidelines and the heavy enforcement of social distancing, many business owners faced a significant number of struggles due to the difficulties brought upon them by implementing the worldwide lockdown.
One of the most common problems which many business establishments faced were in the form of a deteriorating revenue stream and hardships they had to face due to reduced profits which depreciated every month.
However, if you were one of these declining businesses that had to scale back due to the pandemic, there is a silver lining: you may qualify for ERC. Furthermore, there is also the possibility of you being eligible to qualify as a recovery startup business.
Let us discuss this in a bit more detail, understanding what Employee Retention Credit and a recovery startup business are in greater detail. We will also discuss how you can qualify to claim tax credits for being a recovery startup business.
What Is the ERC Program?
Introduced in March 2020, the ERC, also known as the employee retention credit program, was launched under the CARES act.
The primary function of this program is to help those businesses retain their full-time employees who had no choice but to downsize due to financial losses due to the lockdown.
Essentially, this program involves refundable tax credit to all companies qualified for this program. Still, the catch is that the refund is only applicable to payroll taxes based on a percentage of the wages a business pays its employees.
As the name suggests, this program is designed to encourage eligible companies of all scopes who had to go through a substantial financial loss due to the lockdown to retain their workforce and not downsize. Due to the way that this program works, it favors business owners.
What Is a Recovery Startup Business?
This term was introduced when the ERC program was introduced to businesses that were scaling back and primarily defines startups due to their increasing number during the lockdown.
Although many negative aspects arose in the corporate world due to the lockdown, some positive trends also came into the spotlight.
Despite the challenges and hardships everyone around the world had to face due to the Covid pandemic and the resulting lockdown, the one positive which was observed in the realm of business was that a significant number of startups were launched during that period across the entire world.
To cope with the rising number of startups during that time and to make sure that they retained their presence and workforce, the government released the recovery startup business clause, which allows startups to take advantage of ERC.
This term is primarily based on the American Rescue Plan act. It is used to define any business establishment launched during the pandemic, qualifying them to receive tax credit according to the ERC program.
How Can an Establishment Identify as a Recovery Startup Business?
It may seem like any business launched during the lockdown could qualify as a recovery startup business, but there is a little more to it.
The eligibility criteria which a startup that began during the pandemic lockdown is as follows:
- The business must have been launched on or after 15th February 2020
- The annual gross receipts your startup business accumulates during the tax years 2020 and 2021 must not exceed $1 million.
- As a business owner, your startup must contain at least one employee who has received a W2 tax form. This does not include any family member or the owner-operators associated with your business.
An example of this is that if you are one of those business owners who have launched their own business and even if their operations began on April 2020, the business owner would qualify to be a recovery startup business if they earned revenue of less than $1 million during the financial years of 2020 and 2021.
However, if you were to launch your business during or after the second tax quarter of 2021, you would not be eligible to receive any employee retention credit for either the year 2020 or the first two quarters of 2021 as well, under normal circumstances.
That being said, some exceptions can be made under special circumstances. An example is that if your business meets specific requirements and qualifies for revenue reduction or a government order, it might also be able to redeem tax credits for the previous quarters.
What Can a Recovery Startup Business Claim?
Suppose your business has passed through all the eligibility criteria and has been defined as a recovery startup business. In that case, the total tax credit your business can receive following a quarterly rate according to the number of workers employed in your startup.
Keeping this information in mind, the government’s average credit is around $7,000 per worker during a tax quarter.
Furthermore, the maximum tax credit your business can accumulate throughout the final two quarters of the tax year is $50,000.
To ensure you are collecting the maximum tax credit during the quarter, a great practice is to monitor your business’s gross receipts throughout the year.
When doing so, it is essential to ensure that the annual revenue amount does not exceed $1 million, as exceeding that amount would go against the eligibility criteria for being considered a recovery startup business.
What Are Qualified Wages?
As proposed in the CARES act, which the ERC comes under, the qualified wages of your business depend on your business’s size, which is measured by the number of workers employed by your company.
How it works is that if you are a business owner who owns a company that has an average of 100 or lesser employees who work full-time during the tax year of 2020, or the company consists of a workforce that is less than 500 full-time employees throughout the year 2021, the qualified wages would be including the entirety of salaries you paid to your employees.
Furthermore, this includes all wages paid to these employees, whether they were working in the company at that time or not.
Not only their basic pay but also other benefits, including expenses that were covered by a possible health plan in the case that this expenditure was covered during the quarter as a part of being qualified as a recovery startup business.
Moreover, to determine whether an employee working for you is full-time, it is essential to understand that any worker who was clocked in for more than 30 hours a week would be considered to have been employed full-time.
In addition, the definition of qualified wages changes when you have more than the mentioned amount of full-time employees working for your company.
In the case that your overall workforce exceeds 100 for the tax year 2020, or 500 for the year 2021, how the qualified wages would work is that they would consist of the wages which you have paid to only those employees who were not able to work during the lockdown due to either being a part of suspended operations as per a government order or due to a noticeable revenue decline in the gross receipts.
What if an RSB Goes Through a Merger?
There are many instances of a recovery startup business not being able to cope with the market, in which case they are acquired by another company or engaged in a merger with another business.
When dealing with such a situation, it is essential to note that although the IRS has no regulations covering mergers or business acquisitions, the tax code has information regarding a possible case of business acquisition.
It states that an acquired business would be considered to be beginning at the date the business has been acquired, and the probability of an RSB being qualified to claim tax credits according to the ERC program is very high in such a case.
Conclusion
The significant increase in the number of startups during the pandemic played a significant role in economic stability during the recession, which resulted in the lockdown.
Due to this, it was essential for the government to ensure that these businesses stayed afloat, which is why they introduced the concept of a recovery startup business. This guide could help you understand if your startup also falls under this category.
