Understanding the Employee Retention Credit for Recovery Start-Up Businesses
Did you start a business after 2/15/20? Here’s what you need to know about the IRS Employee Retention Credit.
By Dawn Morgan, CPA and Kathleen Martin, CPA
Many entrepreneurs in Tampa Bay entered 2020 with new business ventures in motion or expansions of existing business—opening new locations, new entities or a combination of the two. Despite hits from the COVID-19 pandemic, the Tampa Bay area saw a trending increase in new business applications, according to a February 2022 report from Self Financial. The report analyzed the number of new business applications between 2019 and 2020, among U.S. metropolitan areas, and found there was a nearly 25% increase that held relatively steady through 2021. The Tampa metropolitan area received 48,973 new business applications in 2019. In 2020, that number increased to 62,698 applications — a 28% increase.
While business owners have navigated unpredictable challenges, with awe-inspiring resilience, over the last few years, it is understandable why now they may feel eager to move forward, focusing attention on the present and the future of their enterprise. With tax time each April, business owners are pulled back to review their prior year finances. As books are finalized this tax filing season, there is an opportunity to partially recover financial losses incurred through a potentially substantial tax credit from our dear friends at the IRS.
The Employee Retention Credit (ERC) is highly complex to compute and to properly request the related employment tax refund from the IRS. It is important to work with a CPA to fully explore options to maximize the credit amount, especially when aggregating payroll for multiple businesses or if a PPP loan is involved. A PPP loan does not preclude a business owner from claiming this credit. While a CPA is strongly recommended for the calculation and tax filings, business owners can evaluate the possibility by understanding the basics of the credit amount and eligibility requirements.
Potential tax credit amount
Eligible employers may claim a credit of up to $7,000 of wages, paid per employee per quarter in 2021 or $5,000 per employee per quarter in 2020. This credit is based on a percentage of wages paid per employee and there are additional limitations for large employers. Wages paid to owners and related parties are excluded.
- An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to the coronavirus disease (COVID-19); or
- An employer that experiences a decline in gross receipts compared to the same quarter in 2019:
2020: 50% decline
January-September 2021: 20% decline; or
- A recovery startup business.
A recovery startup business is an employer that began carrying on any trade or business after February 15, 2020, with average annual gross receipts of $1,000,000 or less, and is otherwise not an eligible employer described in items 1 or 2 above.
New business location case study
A physician opens a second practice location in January 2021, with a new tax ID and legal entity. Due to rising healthcare needs, the first location did not experience a revenue loss. If the combined 2021 revenue of the practice’s first location and second location are less than $1,000,000, the physician may claim a tax credit of up to $50,000 per quarter, for all of 2021, for the wages paid in the new practice.
Established restaurant case study
A community favorite restaurant has six locations and over $1,000,000 in combined revenue. In Q1 2021, this restaurant groups’ combined activity experienced a decline of revenue greater than 20%, compared to Q1 2019. They may claim a tax credit of up to $7,000 per employee, for Q1, at all six locations.
If you’ve started a new business or expanded your business since the start of the pandemic, it’s important to work closely with your accountant to determine how the Employee Retention Credit may benefit your business.
Manager Dawn Morgan, CPA of KB Healthcare Consultants, provides focused accounting and tax service solutions to closely held healthcare practices, including all physician specialties. Manager Kathleen Martin, CPA of Kerkering Barberio Outsourced Accounting Services, offers a diverse set of tax and accounting services to businesses, nonprofits and family trusts, ranging from basic transactional services to virtual CFO/consultant advisory services.