Recovery Startup Business - Employee Retention Tax Credit
The IRS has issued yet another warning about ERC and Recovery Startup Businesses tax fraud! Read the alert here, and be careful of anyone emailing, texting or doing TV ads about “easy” government money!
In mid-September 2023 the IRS “frozen” new applications for this program because they are seeing too many fraudulent claims. IRS Commissioner Danny Werfel said, “we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply.”
We urge small businesses and startups that are approached by aggressive tax credit marketers to consult with their trusted tax CPA. Scroll down to see common messages that fraudulent tax credit providers use, and since the program is currently frozen, don’t waste your time (or spend money) getting a credit put together by anyone other than your most trusted tax adviser.
Companies founded after February 15th, 2020, are likely eligible for a special form of employee retention tax credits (ERC or ERTC’s). These businesses are called “Recovery Startup Businesses’’ in the context of employee retention tax credits.
Now that’s a mouthful, but it’s actually really important for your startup, especially if your company was incorporated or founded after February 15th, 2020. The American Rescue Plan Act of 2021, acknowledges that starting a company during COVID was difficult, and this attempts to help those companies with their cash flow. Specially, the government will give “recovery startups” tax credits to help them hire by making hiring new people cheaper.
According to the IRS, a recovery startup can still claim the ERC for wages paid after June 30, 2021 and before January 1, 2022.
Qualification tests for recovery startups and employee retention tax credits
There are a couple tests to make sure that your startup is eligible as a recovery startup for these ERC. The first one was the business started on or after February 15th, 2020. Basically when COVID hit the United States. The second one is the company must have had an average of $1 million or less in gross receipts every year.
If your company was started in 2020 and you are filing for this in 2021, you’re basically just looking at the 2020 year. Did your company do less than a million dollars in gross receipts / revenue in 2020? And for most startups except for the just ginormous rocket ships, they’re all going to be able to answer yes. They’re going to qualify for that because it’s very rare that a company can do a million dollars in revenue in its first nine or ten months of operation.
Watch out for fraud!
It’s disturbing to talk about, but we have seen a massive number of sketchy “ERC/ERTC providers” pestering our clients offering to help them qualify for this credit - even though many of the clients do NOT qualify!
This is fraud!
Don’t get caught up in this. If you are getting phone calls offering to get you “$26,000 per employee” - don’t fall for it. Talk to a real CPA to find out if you qualify.
ERC fraud on the IRS “Dirty Dozen” list
The Internal Revenue Service added Employee Retention Credits to their ‘Dirty Dozen” tax fraud list! Watch out! “Businesses should be wary of advertised schemes and direct solicitations promising tax savings that are too good to be true,” said IRS Commissioner Danny Werfel said. “They should listen to the advice of their trusted tax professional. Taxpayers should remember that they are always responsible for the information reported on their tax returns. Improperly claiming this credit could result in taxpayers having to repay the credit along with potential penalties and interest.”
Basically, the IRS is saying that they are seeing a lot of companies promoting to offer free government money through this program - and it’s not legit in many cases. And they are reminding business owners (and their tax preparers) that if you submit a tax return with bogus (or poorly documented!) ERC claims you could be in serious legal trouble.
What ERC fraud sounds like
Here are some of the warning signs that business owners should watch out for:
- Get $26,000 per employee
- Free government money
- Qualification based on supply chain issues
- Qualification based on needing to wear masks
- Qualifications based on taking precautions to prevent the spread of COVID in the workplace/office
- Unable to visit clients = qualifications
How much can a recovery startup get with the ERC?
So the good news here is your startup can save basically $7,000 per employee on a tax credit, assuming they pay at least $10,000 or more to that employee in the eligible time periods.
It’s capped at $50,000 per quarter. So $50,000 in Q3, $50,000 in Q4, 2021. So basically you need about seven or eight employees to, and assuming you’re paying typical startup engineering wages, you will max out at $50K per quarter in credits. So you’re looking at $100,000 tax credit on payroll taxes over the two quarters.
How to claim ERCs if you are a recently founded startup
The way you claim that is to work with your payroll provider and your friendly startup CPA firm, Kruze Consulting, to make sure you’re eligible and actually go through a questionnaire. Then your CPA can walk you through the process that you’ll use in your payroll provider to claim the credit (our team has been doing Zoom share screens to help our clients walk through the process with Gusto, Rippling and other popular payroll providers.)
Providers like Rippling, Gusto, Justworks, TriNet, have really good workflows for this. And you will answer the questions in the payroll system’s site. Again, questions like “did you start after February 15th, 2020. Did you do less than a million dollars in average revenue?” And a couple more questions, and then they will actually enable your company to have the tax credit. So it’s actually really slick. Shout out to our payroll provider relationships for doing a great job, putting this into their software very quickly and shout out to the Biden administration and Congress for putting this act into place.
At Kruze we have hundreds of companies that actually qualify for this, so it’s pretty exciting. But it’s also a little overwhelming, it’s a lot of work, but we’re happy to do it and love helping our companies. So just remember if your company was started after February 15th, 2020, you are probably eligible for the recovery startup business portion of the employee tax credit. And just reach out to your CPA firm.
FAQS
- What is a Recovery Startup Business ERTC?
- Are new companies eligible for employee retention tax credits?
- What’s the maximum amount of ERC for a recovery startup?
- How does a Recovery Startup apply for an ERC?
- The IRS is Paying Interest on ERC Refunds
- Can you claim both the ERC and have gotten a PPP loan?
What is a Recovery Startup Business ERTC?
In order to meet the definition of a “Recovery Startup Businesses’’ in the context of employee retention tax credits, as authorized by the US Congress, a company must have 1) been founded after Feb 15, 2020; and 2) also have less than $1 million in revenue. Consult with your CPA for more details.
Are new companies eligible for employee retention tax credits?
Yes. In 2021, Congress passed new legislation that let “recovery startups” - ones founded after Feb 15, 2020, to claim the Employee Retention Credit (ERC). The company must also have less than $1 million in revenue.
What’s the maximum amount of ERC for a recovery startup?
Congress/the IRS have capped the ERC for recovery startups at $50,000 per quarter. With two quarters to apply these credits, that’s $50,000 in Q3, $50,000 in Q4, 2021. So you’re looking at $100,000 tax credit on payroll taxes over the two quarters, assuming you have seven or eight engineering employees making typical silicon valley wages.
How does a Recovery Startup apply for an ERC?
The best way to let the IRS and Federal Government know that you are claiming the ERC is to work with your payroll provider and your CPA firm. Providers like Rippling, Gusto, Justworks, TriNet, actually have really good workflows for applying for the ERC.
The IRS is Paying Interest on ERC Refunds
Eligible startups that have been awarded employee retention credit (ERC) refunds from the IRS but haven’t received them will get a little bonus. The IRS is paying interest on these refunds to help compensate your company for the time you waited for your payment. Currently the IRS is backed up due to staffing challenges and pandemic stimulus programs, so some refunds have been delayed. Recognizing this, the IRS has been providing interest payments for refunds that are backlogged.
Can you claim both the ERC and have gotten a PPP loan?
Yes, the Consolidated Appropriations Act 2021 allowed taxpayers to utilize both the ERC and PPP, as long as the same wages were not claimed for both programs. PPP loan forgiveness and ERC wage eligibility in the same time period is a no no! This opportunity was provided to taxpayers who couldn’t previously take advantage of the ERC because of their participation in the PPP.
BUT - since companies can not ‘double dip’ on the same wages in the same period, startups really need to work with their CPA to make sure that the wage periods covered under the PPP vs. the ERC do not overlap. This is an area that we, as an accounting firm, helped our clients out a lot.
The IRS provided more specific information through the release of IRS Notice 2021-20, which covered the ERC for 2020, IRS Notice 2021-23, which covered the quarters ending March 31 and June 30, 2021, and IRS Notice 2021-49, which addressed the quarters ending September 30 and December 31, 2021. The Infrastructure Investment and Jobs Act later eliminated the quarter ending December 31, 2021, except for Recovery Startup Businesses.
