Navigating the many tax credits that came out as a result of Covid can be super complicated, each one with their own acronym----PPP, EIDL, ERC, etc.
As you already likely know many of the Covid stimulus programs out there wasn't available to you as a startup in 2020. PPP loans were for businesses that were already in existence when Covid hit.
In this article we are going to focus on the tax credit that is for a new business that started operations after Feb 15 2020. If you started operations before Feb 15th 2020, then click here to read about the Employee Retention Credit.
Most business owners don’t just open their doors, they have months of planning and costs before they can start or become operational. You may have started the process in 2019 but not really open your doors to be operational until after Feb 15th 2020. It doesn't mean that you weren't affected by Covid, I'm sure you were as everyone was. You just didn't qualify for many of the business stimulus programs.
There is one credit that focuses on startups like you! It’s called the Recovery Startup Credit! You could get a tax credit up to $50,000 for each of these two quarters Q3 2021 and Q4 2021.
What is the Recovery Startup Credit?
This recovery startup credit is specifically designed for businesses that started operations at the start of Covid. Meaning you started business operations AFTER Feb 15th 2020. The goal with this credit is to help you cover payroll costs for employees during Q3 2021 and Q4 2021.
Do you Qualify for the Recovery Startup Credit?
Your business qualifies IF you meet the all of these tests.1. Your business started operations AFTER Feb 15, 2020.
2. Your business had less than $1,000,000 in average revenue over the prior 12 months. (If you take the 12 months prior to June 30th 2021, did you earn over $1,000,000)?
3. Have employees other than yourself and family in Q3 2021 and Q4 2021.
Ultimately to qualify you have to have employees (not contractors) as this is a payroll tax credit.
What is the Recovery Startup Tax Credit Amount?
The recovery startup tax credit amount is a potential total credit of $50,000 for quarter 3 2021 and quarter 4 2021 for a total of $100,000.
Add up what you paid each employee for quarter 3 2021. Then you take that number and add any qualified benefits. The max wages to be used per quarter is $10,000 per employee and the credit is 70% of the qualified wages/ benefits up to $7,000 per employee per Q3 2021 and Q4 2021.
In general if you paid an employee roughly $10,000 in quarter 3 2021 ($40,000 per year) then you would qualify for the max credit for that employee in that particular quarter.
Recovery Startup Credit Example
Let’s say your business became operational in March 2020 and your average annual revenue is $500,000. So you are well under the $1,000,000 mark.
In Q3 2021 you have 7 employees that each earn $40,000 per year. In Q3 each of them were paid $10,000.
The credit for those 7 would be $10,000 * 70% = $7,000 * 7 employees = $49,000 tax credit.
Let’s say though that you hired an 8th employee in Sept 2021. They were paid $1,000 in Q3 2021. Then you would be able to count those wages as well. So $1,000 * 70% or $700. The total credit goes up to $49,700.
Assume the same facts as above except now you have 10 Employees making $10,000 for Q3. $10,000 * 70% * 10 Employees = $70,000. The max RSC is $50,000 for quarter 3 so your total credit for quarter 3 is $50,000.
Frequently Asked Questions
1. Do I have to pay it back?
No you don’t have to pay it back as this is a tax credit.
2. How much is the recovery startup tax credit?
You can get a credit up to $50,000 per quarter for Q3 and Q4 2021 for a max total of $100,000.
3. Is it taxable?
Yes is the short answer. The long answer is normally you deduct your payroll expenses which lowers your profit. Whatever credit amount you get will reduce those expenses and increase your taxable profit. Let's say that you payroll is $50k per quarter so a total for $200k for the year. You max the credit and get $100k in RSC back. Your payroll expense will go from $200k down to $100k ($200k - $100k credit). As a result your taxable profits will increase. We can review the tax consequences in detail with you.
4. How do I apply for this?
We recommend that you contact us today. You can call or text us at 813-252-0829, we will calculate the credit, help you apply and keep in contact with the IRS to ensure the credit is sent to you.
5. What info will you need for us to apply?
- Date of when business started operations
- Access to your financials (Profit and Loss / Balance Sheet)
- Payroll Detail by Employee for Quarter 3 and Current Quarter 4 2021
- Latest Business Tax Return (If applicable)
- Q3 2021 Payroll Tax Returns - 941
Don't miss out on the ERC stimulus that is available right now. If you don't know if you qualify then CLICK HERE to answer a few questions for us and we will help you determine if you do. You can also call or text us today at 813-252-0829 or just simply BOOK A TIME on our calendar.