Learn how to qualify for the IRS tax credit for recovery startup businesses, including the eligible employer size and wage requirements. In short, your business or trade must have begun carrying operation after February 15, 2020, and paid qualifying wages to W2 employees in Q3 or Q4 of 2021 while not exceeding $1 million in annual gross receipts in either 2020 or 2021.
Recovery Startup Credit
The recovery startup business (RSB) tax credit was introduced in the American Rescue Plan Act (ARS) to include businesses that were previously ineligible for the Employee Retention Credit (ERC).
This provision defined eligible employers of an RSB to be those who began operations after February 15, 2020, and had average annual gross receipts of less than $1,000,000. This new payroll tax refund offered by the Federal Government applied to qualified wages paid to W2 employees in Q3 of 2021 with a maximum amount of $7,000 per employee up to a total of $50,000.
In the Infrastructure Investment and Jobs Act (IIJA), an amendment was added to include eligibility for another $50,000 maximum tax credit for qualified wages paid by an RSB in Q4 of 2021.
Unlike the Employee Retention Tax Credit, recovery startups do not need to show a decline in gross receipts or to have had their business affected by full or partial suspension in any calendar quarter to claim a refund.
If you take our simple 5-minute ERC Quiz you will instantly know if you are eligible for a 2020 or 2021 payroll retention tax credit refund, or as a recovery startup business. The IRS estimates that 70-80% of all US businesses will qualify for a refund after new legislation was added to include:
- Non-profit organizations and companies that received PPP loan forgiveness
- Businesses that turned a profit during the pandemic, qualifying alongside those who had a 20% decline in annual gross receipts.
Recovery startup businesses have an entirely different set of ERTC qualifications. First off, RSBs have to be disqualified from the Employee Retention Tax Credit eligibility requirements to qualify for an RSB refund in Q3 of 2021. For Q4 refund eligibility, however, this criteria does not apply, as ERTC refunds only apply to the first three quarters of 2021.
Secondly, successful RSB applicants only need to show they began business operations after Valentine’s Day in 2020, while also not averaging more than $1 million in annual revenues.
- Began carrying on as a trade or business on or after February 15, 2020
- Have one or more W2 employees, not including family or owners
- Paid said employees during the 3rd and 4th quarters for 2021
- Have gross receipts totaling under $1 million for 2020 and 2021 individually
- Must not meet ERTC-eligible employer requirements when claiming for Q3
For businesses who were eligible to apply for an Employee retention credit for Q3 in 2021, you must do so through the ERTC application, but you can still apply as a recovery startup business for Q4 and receive a maximum tax credit of $50,000.
A startup business that opened during the Coronavirus pandemic can claim a maximum payroll tax credit of up to $100,000 based on qualifying wages paid to W2 employees during the third and fourth quarters of 2021.
RSB refunds are capped at a maximum of $7,000 per employee, per calendar quarter (Q3 and Q4) with a maximum per employee refund totaling $14,000.
Each W2 employee paid between June 1 and December 2021, would be eligible for a 70% refund based on a maximum of $10,000 in wages being paid during each quarter. For employees who were paid less than $10k per quarter, the eligible refund would not exceed the maximum allowable.
No matter how many employees your company has, the maximum RSB tax credit you can claim is $50,000 per calendar quarter. If you are eligible for the quarterly maximum in both Q3 and Q4 then your recovery startup business refund can equal $100,000 in total.
You can our free ERC Calculator to get a rough estimate of how big your refund check could be if you could qualify each eligible employee for the ERC maximum credit rebate.
The easiest way for eligible businesses to receive the maximum $100k Recovery Startup tax credit would be to have eight W2 employees who were paid at least $10,000 in wages during Q3 and Q4.
Quarter Employees Wages 70% Refund Max Cap Total Refund
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If you paid your W2 wages of less than $10,000 per quarter, then you would need more employees to reach the maximum refund amount.
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Tax refund up to $26k per employee!
Through the Employee Retention Tax Credit, the IRS grants eligible employers a credit equal to 70% of qualifying wages per W2 employee, PER quarter.
If your business experienced a significant decline in gross receipts or was impacted by government shutdowns due to COVID-19, then let us help you solve the IRS’s refund application puzzle. You can prequalify today, just by answering 8 simple Yes or No questions.
The process to claim the employee retention tax credit has been updated numerous times since the Coronavirus Aid, Relief, and Economic Security Act was passed by the 116th U.S. Congress and signed into law on March 27, 2020. Originally there were no tax incentives for new businesses found within the ERC, but that all changed when the American Rescue Plan Act unveiled the Recovery Startup Credit (RSC).
In March 2020, the Employee Retention Credit (ERC) was unveiled with little fanfare and almost instantly took a backseat to Paycheck Protection Program (PPP) loans. At the time, businesses with one or more employees were allowed to claim up to $5,000 per employee through this refundable tax credit based on a gross receipts reduction from the same calendar quarter in 2019.
Large employers had their eligible wages capped at 100 or fewer full-time employees who provided services in 2019, whole companies with greater than 100 average full-time employees could only claim those same wages paid to employees not providing services. No provisions existed at this time for an ERC recovery startup business or those who get PPP loan forgiveness in the future.
With the Recovery Startup Credit only being applicable to the third quarter/fourth quarter 0f 2021, no Cares Act rules or calculations are needed.
Numerous changes to ERC guidance were made in the Disaster Relief Act of 2020, and while there was no mention of recovery startup businesses, many of these ERC rules apply to newly opened businesses.
All recovery startups that are nonprofits or tax-exempt organizations, or are a college/university that primarily focuses on medical or hospital care can now claim ERCs because of rules changes made in the Relief Act. The new revenue reduction requirements of a 20% decline in gross receipts also now applies to ERTC recovery startup business claims, as does the increased maximum to 70% of qualifying wages or $7,000 per employee, per quarter.
While the large employer limit was increased to 500 or fewer average full-time employees, new startup businesses that grossed more than $1 million in average annual revenue would be ineligible for the RSC. The provision that allowed employers to claim both the ERC and PPP could also come into play if your recovery start-up business qualified for one.
Finally, in the third major COVID-19 relief bill the Recovery Startup Credit (RSC), was introduced in the American Rescue Plan Act (ARPA). As of March 2021, RSBs can now claim a maximum credit of $50,000 per quarter in Q3 and Q4 of 2021, with a maximum total credit of $100,000. Beyond not meeting ERC eligibility criteria (full or partial suspension or a decline in gross receipts), Recovery Startups were required to have:
- Began carrying on any trade or business after February 15, 2020
- Average annual gross receipts under $1,000,000
The employment tax offset of payroll costs related to an ERTC advance payment was also changed from the employer’s portion of social security taxes to Medicare taxes. While severely financially distressed employers were defined as having 10% less gross receipts when compared to the same quarter in 2019.
While this bill did not affect the ERTC for new businesses, it did repeal 4th quarter eligibility for those claimants who are not recovery startup businesses. No new ERC rule changes have taken place since, nor are any expected in the future.
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