Started a Business in 2020 or 2021? You May Qualify as a Recovery Startup Business For The Employee Retention Credit
If you started a business just prior to, or during, the pandemic… we’re sorry?
But in all seriousness, congratulations on achieving a big milestone during such a tumultuous time. And we may have some encouraging news for you.
While you may not have previously qualified for any stimulus funding from the government (i.e. The Paycheck Protection Program or Economic Injury Disaster Loans), there is one credit that you do qualify for now.
It’s called the Employee Retention Credit. And it could see you earn up to $100,000 in the form of a tax refund from the IRS this year.
Sound good? Keep reading!
In this post, we’re going to walk you through what the Employee Retention Credit is, what’s changed, and why your business certainly qualifies even if you started operations after, February 15, 2020.
Let’s dive in!
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit from the IRS against certain payroll taxes in 2020 and 2021.
In short, it’s funding from the government to help small business owners, with one or more employees, navigate the consequences of COVID-19.
It came out of the same CARES Act in 2020 as The Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL), and we dare to say that it’s even better than both programs.
Why? Because, unlike PPP and EIDL, you don’t have to pay the Employee Retention Credit (ERC) back or spend it in any particular way!
And for businesses who started operations after February 15, 2020… you finally qualify!
If you’ve been reading our articles for a while, you’re aware of just how many times the Employee Retention Credit rules have changed.
In a bid to stimulate the economy and get more businesses up and running post-apocalyptic-2020, the government has been loosening its grip on the criteria for months now: increasing the amount of credit you can claim per employee, extending the length of the program, and allowing businesses to combine multiple stimulus programs at once.
Now, thanks to the American Rescue Plan Act of March 2021 (which you can read more about here), they’ve changed who can apply for the Employee Retention as well.
New businesses are now eligible to receive funds as a Recovery Startup Business. That means you!
What is a Recovery Startup Business?
Written into law with the American Rescue Plan Act, new businesses that opened during the pandemic are now eligible to receive stimulus funding as a Recovery Startup Business.
A Recovery Startup Business for the purposes of the Employee Retention Credit is defined as a business that:
- Began operations on or after February 15, 2020, and
- Average annual gross receipts do not exceed $1 million
If this sounds like your business, keep reading. You could be eligible to earn up to $100,000 in tax refunds from the IRS later this year.
How do Recovery Startup Businesses qualify for the Employee Retention Credit?
If we thought it was easy for small businesses to qualify for the Employee Retention Credit (and it is!), it’s even easier for brand new businesses.
As a Recovery Startup Business, here is what you need to qualify for the ERC:
- You must have 1 or more employees (other than >50% owners and certain family members of theirs)
- You must be a startup company and started operations on or after 2/15/2020
- Note: If you purchased an existing business that was open on or before 2/15/2020 your business is may or may not be a startup business depending on your specifics. It would, however, certainly qualify under the other ERC rules including restriction and reduction in revenue criteria.
- You must have gross receipts under $1 million dollars for 2020 and 2021 each
- If you own multiple companies or have common ownership, you will need to speak to an accountant as the requirements differ and are beyond the scope of this blog. (In short: certain businesses with common ownership are grouped together through what the IRS calls “attribution rules.”)
- You must not be eligible for ERC under the other requirements, i.e. a significant decline in gross receipts or subject to governmental imposed orders/restrictions.
- You will be paying employees during Q3 and Q4 of 2021.
If it sounds straightforward, that’s because it is.
There are essentially zero stipulations to qualify for the ERC under these new rules for new businesses, as long as you opened doors on or after 02/15/2020 and make less than $1M in revenue.
Now let’s dive into a few more nitty-gritty details.
How is the Employee Retention Credit different for brand new businesses?
[this section has been updated to reflect updated IRS guidance]
As a brand new business, there are a few things you can’t do when it comes to the Employee Retention Credit.
Unfortunately, you can’t claim the recovery start up credit for any of 2020, nor can you claim Q1 or Q2 of 2021. However, per updated guidance, recovery start up business may claim the credit for these prior periods if they meet the revenue reduction or government restriction criteria.
But the good news is, regardless of the above recovery start up businesses do qualify for up to $50,000 in credits for each quarter of Q3 and Q4 of this year – 2021. Please note: if your business also qualifies under the restriction or reduction in revenue criteria then the $50,000 cap no longer applies as the business would then be qualifying under the original ERC rules.
Note: In order to qualify for the credits, you must be paying staff taxable wages as employees during applicable quarters.
The best type of entity that will benefit the most from the ERC will be an S or C-Corporation, however, all entity types that meet the above criteria are eligible.[end of edits]
How much will I get back from the Employee Retention Credit?
Now for the fun stuff.
While the calculations for the exact amount you get back will depend on a few factors, we’ll help you make a simple calculation now.
As a new business, you are eligible to receive up to $7,000 per employee, per quarter, capped at $50,000, for the final 2 quarters of this year.
Here’s an example.
Let’s say you have 5 employees.
$35,000 (5 employees x $7,000 per employee) in Q3 + $35,000 (5 employees x $7,000 per employee) in Q4 = $70,000
As a new business with 5 employees, you would receive a $70,000 check from the IRS this year.
That’s a lot of money for a new business!
With $70,000, you can buy new equipment, sign up for a nicer lease, or do more marketing – whatever you need to accelerate your business growth this year. You can even just distribute the funds to the owners. There are no stipulations for how these funds must be invested or spent.
What Can Recovery Startup Businesses Do To Get The Most Money Back?
There are a few things you can do between now and when you apply to get the most money back from the Employee Retention Credit.
Here are a few things we suggest:
- Monitor your gross receipts to ensure you are under the $1 million dollar threshold for 2020 and 2021, each.
- File for the ERC after Q3 & Q4 of 2021 to claim the credits.
- Maximize employee wages (up to $10,000 in wages for each employee each qtr.) during Q3 (July-September) and Q4 (October-December) of 2021.
- Keep in mind that most owners, spouses and other family members (parents, siblings, children, etc.) most likely will not count as eligible employees.
Final guidance from the IRS on the Recovery Startup Business Provision was recently released and can be found here.
And as always, we recommend working with a very experienced accountant to help you maximize the amount of credit for your unique situation. If working with us for your calculations, we will be able to answer any questions you may have once you get started.
How do I apply?
In order to capitalize on the Employee Retention Credit (ERC) as a new business, you need to find an accountant to help you make the calculations.
Here at The Fitness CPA, we are providing free calculations for all gym and fitness businesses until the end of 2021.
That’s right – completely free! After you receive the calculations, you are under no obligation to work with us to finalize the process.
We simply want to help as many fitness businesses as we can get back on their feet post-COVID.
If you think you qualify as a Recovery Startup Business, head over to our form to Calculate Your ERC For Free.
You will receive an email to fill in a few more documents for us to finalize the calculations. After that, we’ll reach out to you as soon as it’s finalized to let you know how much you can receive back from the IRS.
As always, if you have any questions, you can reach out to one of our accountants on our Get In Touch page. We’re happy to help.
Until next time!