Understanding the Recovery Startup Provision of the Employee Retention Tax Credit
To encourage small businesses to invest in new opportunities, Congress expanded the Employee Retention Tax Credit for companies that have recently started a new trade or business and those that will do so before the end of 2021.
Am I eligible?
To be eligible for the Recovery Startup provision of the Employee Retention Tax Credit you must meet these two criteria:
- Your business must have average annual gross receipts of no more than $1,000,000 over the three year period including 2018, 2019, and 2020; and
- You began a new trade or business after February 15, 2020.
What is a new trade or business?
By definition, a ‘new trade or business’ can be an entirely new company, or it can be a new trade, product, or service offering within an existing business. At a minimum, a business must:
- Enter into and carry on a new activity with a good-faith intention to earn a profit; and
- Engage in the new activity on a regular and continuous basis.
If you started a new activity within an existing business, the next several questions provide additional support for your claim. The more you can answer in the affirmative, the stronger your claim. But no single factor is definitive. We advise that the new business activity should meet at least two of the following.
- Are there separate records or bank accounts for this business activity?
- Is the activity performed in a separate facility or location?
- Is the activity performed by different employees?
- Does the activity have a different name or brand?
- Does the activity have a different website or marketing strategy that supports it?
- Does the activity target different customers?
- Does the activity require you to invest in different assets or hire new employees to perform it?
How much is it worth?
Under the Recovery Startup provision, the credit amount is 70% of qualified wages paid from either the start of the new trade business or July 1, 2021, whichever is later. Qualified wages are capped at $10,000 per employee per quarter. The total credit cannot exceed $50,000 per quarter, with a maximum of $100,000. The credit can be claimed in the third and fourth quarters of 2021.
For example, you could claim the maximum $100,000 tax credit if you have eight employees earning at least $40,000 in annual wages.
|Employee||Annual Wage||Quarterly Wage||Capped Wage||70% of Wage|
|Q3 Credit, Capped||$50,000|
|Q4 Credit, Capped||$50,000|
|TOTAL 2021 TAX CREDIT||$100,000|
with eight employees earning $40,000 in annual wages, you could claim $100,000 in tax credits
What if I get audited?
The IRS has extended the audit window to five years for these claims. Fully documenting your eligibility and credit calculation is an important first line of defense. Watch out for these gotchas:
- Do not ‘double dip’ in different programs (e.g., WOTC, R&D, ERTC) with the same wages.
- The same wages cannot be used both to qualify for forgiveness of a PPP loan and as ERTC wages.
- Differences in ERTC eligibility and calculation from 2020 to 2021.
Start something new — soon. Launch a new company or a new product/service offering to take advantage of this tax credit. Take action by June 30, 2021 to optimize employee wages that can be applied in Q3 and Q4 of 2021. It is important to safeguard access to these tax credits. Our team at Clarus R+D can verify your eligibility, optimize your credit, and deliver documentation to support your claim.