ERC Qualifications for Recovery Startup Businesses

erc recovery startup business

January 25, 2024

Recovery Startup Business ERC Qualifications

If you started a business just prior to, or during, the pandemic, you may qualify for the Employee Retention Credit (ERC) as a recovery startup business

Previously, newly established businesses didn’t qualify for stimulus funding. But with the American Rescue Plan Act, new businesses that began operations after February 15, 2020, and have average annual gross receipts of less than $1 million, now qualify for the ERC. This credit can provide up to $100,000 in tax refunds from the IRS.

But what is the ERC program, and do you qualify for an Employee Retention credit as a recovery startup business? Let’s cover the basics.

Key Takeaways

  • Recovery startup businesses can qualify for the ERC, a refundable tax credit from the IRS.
  • To be eligible, your business must have started operations after February 15, 2020, and have average annual gross receipts of less than $1 million.
  • The ERC can provide up to $100,000 in tax refunds.
  • Brand new businesses can claim the credit for Q3 and Q4 of 2021, up to $50,000 per quarter.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a valuable payroll tax credit provided by the IRS to support businesses during the challenging times brought about by the COVID-19 pandemic. Introduced as part of the CARES Act in 2020, the ERC is designed to help small businesses navigate the financial consequences of the pandemic and retain their employees.

The ERC stands out from other stimulus programs such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) because there are no specific requirements for how you spend the money. It’s also not a loan, so it doesn’t have to be paid back. This means that businesses have greater flexibility in how they can use the credit to support their operations and employees.

To qualify for the ERC, businesses must only have one or more employees, making it accessible to a wide range of small businesses, including recovery startup businesses. This tax credit serves as a lifeline for businesses, providing them with financial relief in the form of reduced payroll taxes.

Key Benefits of the Employee Retention Credit

Key Considerations

  • Refundable tax credit against certain payroll taxes
  • Flexible use of funds to support business operations
  • No requirement for repayment or specified spending
  • Helps businesses retain and support employees
  • Available to businesses with one or more W2 employees
  • Should be claimed in accordance with IRS guidelines
  • Businesses must meet eligibility criteria
  • Keep accurate records and documentation
  • Work with experienced professionals 
erc recovery startup business

What is a recovery startup business?

A recovery startup business refers to a business that commenced operations on or after February 15, 2020, that has average annual gross receipts of less than $1 million, and does not meet the other eligibility criteria of the ERC. 

Previously, new businesses were not eligible for the Employee Retention Credit (ERC). However, thanks to the American Rescue Plan Act, these businesses can now access stimulus funding through the ERC. If your business meets the specified criteria, you have the potential to receive tax refunds of up to $100,000 from the IRS.

 

How do recovery startup businesses qualify for the ERC?

To qualify for the Employee Retention Credit (ERC) as a recovery startup business, you must meet the following criteria:

  1. Have one or more employees, excluding owners with more than 50% ownership and certain family members
  2. Started operations on or after February 15, 2020
  3. Have gross receipts under $1 million for both 2020 and 2021

If you purchased an existing business that was open before February 15, 2020, the classification of your business as a startup business depends on more specific details. Smart ERC is available to help you navigate these more intricate elements of the ERC program.

Additionally, you can’t be eligible for the ERC under other requirements, such as a significant decline in gross receipts or government-imposed orders/restrictions. Meeting these criteria will make your recovery startup business eligible for the ERC that way, allowing you to take advantage of this valuable tax credit.

 

How is the Employee Retention Credit different for brand new businesses?

For brand new businesses, the ERC has provided special provisions. While they can’t claim the recovery startup credit for any of 2020 or Q1 and Q2 of 2021, they can claim the credit for these prior periods if they meet the revenue reduction or government restriction criteria. 

However, recovery startup businesses can claim up to $50,000 in credits for each quarter of Q3 and Q4 of 2021. It’s important to note that these businesses must be paying staff taxable wages as employees during the applicable quarters. The entity types that will benefit the most from the ERC are S- or C-Corporations, but all entity types that meet the criteria are eligible.

Here is a breakdown of the differences in the Employee Retention Credit for brand new businesses:

Period

Credit Amount

2020 and Q1/Q2 2021

Not eligible

Q3/Q4 2021

Up to $50,000 per quarter

 

These special provisions allow new businesses to take advantage of the credit as they navigate the challenges of starting up during the COVID-19 pandemic. By claiming the Employee Retention Credit, these businesses can receive substantial financial support to help them grow and thrive.

How much can recovery startup businesses get back from the ERC?

The amount you can get back from the Employee Retention Credit as a recovery startup business depends on the number of employees you have on staff. 

As a new business, you are eligible to receive up to $7,000 per employee, per quarter, capped at $50,000, for the last two quarters of the year. 

For example, if you have 5 employees, you could receive up to a $70,000 tax refund from the IRS. This money can be used to invest in your business’s growth or distributed to the owners.

Employee Retention Credit Tips for Recovery Startup Businesses

To get the most money back from the Employee Retention Credit (ERC), there are a few strategies that recovery startup businesses can implement. 

By understanding the eligibility requirements and taking advantage of certain opportunities, you can optimize your chances of receiving a substantial payroll tax credit.

It is crucial for recovery startup businesses to monitor their gross receipts to ensure they remain under the $1 million threshold for both 2020 and 2021. This is a key qualifying criterion for the ERC and can significantly impact your eligibility to claim the credits.

To navigate the complex eligibility criteria and accurately calculate the credits, it is crucial to work with experienced ERC experts like those at Smart ERC. We specialize in recovery startup businesses and the Employee Retention Credit. Our network of former IRS Auditors can offer valuable insights and guidance to help you make the most of this tax incentive.

Remember to stay informed, consult with professionals, and take proactive steps to optimize your payroll tax credit.

Conclusion

Recovery startup businesses have a unique opportunity to benefit from the Employee Retention Credit (ERC), a refundable tax credit provided by the IRS. By meeting the criteria of starting operations after February 15, 2020, and having average annual gross receipts of less than $1 million, these businesses can receive up to $100,000 in tax refunds. The ERC can provide a significant financial boost to help these new businesses thrive in challenging times.

However, it’s essential for these businesses to understand the qualification requirements and calculate the potential credits accurately. It is advisable to work with experienced professionals who can guide you through the process. By leveraging the ERC, recovery startup businesses can access the financial resources needed to fuel growth, retain employees, and navigate the uncertainties caused by the COVID-19 pandemic.

If you own a recovery startup business, don’t miss out on this valuable opportunity. Take advantage of the Employee Retention Credit and position your business for long-term success.

FAQ

What are the qualifications for the Employee Retention Credit (ERC) for recovery startup businesses?

To qualify for the ERC as a recovery startup business, you must have one or more employees (excluding >50% owners and certain family members), started operations on or after February 15, 2020, and have gross receipts under $1 million for both 2020 and 2021. 

Additionally, you must not be eligible for the ERC under other requirements such as a significant decline in gross receipts or government-imposed orders/restrictions.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit provided by the IRS against certain payroll taxes in 2020 and 2021. It was introduced as part of the CARES Act in 2020 to help small businesses navigate the consequences of COVID-19.

What is a recovery startup business?

A recovery startup business is a business that began operations on or after February 15, 2020, and has average annual gross receipts of less than $1 million. 

Previously, new businesses did not qualify for the ERC, but with the American Rescue Plan Act, these businesses are now eligible to receive stimulus funding.

How do recovery startup businesses qualify for the ERC?

Recovery startup businesses qualify for the ERC by having one or more employees (excluding >50% owners and certain family members), starting operations on or after February 15, 2020, and having gross receipts under $1 million for both 2020 and 2021. 

They must also not be eligible for the ERC under other requirements such as a significant decline in gross receipts or government-imposed orders/restrictions.

How is the Employee Retention Credit different for brand new businesses?

For new businesses started on or after February 15, 2020, the ERC has special provisions. They cannot claim the ERC for 2020 or Q1 and Q2 of 2021 because they did not meet the revenue reduction or government restriction criteria which compare business metrics in those quarters to business metrics in corresponding quarters in 2019. However, qualifying recovery startup businesses can claim up to $50,000 in credits for each quarter of Q3 and Q4 of 2021.

How much can recovery startup businesses get back from the ERC?

The amount recovery startup businesses can receive from the ERC depends on the number of employees they have. As a new business, you are eligible to receive up to $7,000 per qualifying employee per quarter, capped at $50,000 per quarter, for the final two quarters of the year.

What opportunities does the Employee Retention Credit provide for recovery startup businesses?

The Employee Retention Credit provides a significant financial boost to eligible recovery startup businesses. By meeting the criteria of starting operations after February 15, 2020, and having average annual gross receipts of less than $1 million, eligible businesses can receive up to $100,000 in tax refunds. This money can be used to invest in business growth or distributed to owners, with no stipulations on how it must be spent.

Having served as an IRS Auditor for over 13 years, I have acquired a deep understanding of the tax-related challenges that business owners encounter. My primary goal is to ensure that we deliver accurate and dependable information. We aim to provide you with peace of mind as we expertly guide you through the entire process.”

– Alejandra Astudillo, Former IRS Auditor

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