How the ERTC Recovery Startup can Help Your Portfolio Companies


By: Adam Winter, Chief Technology Officer at Clarus R+D, Ohio TechAngel Funds

We all know starting a business or new offering is hard. But starting it just before, or during a global pandemic and navigating it without a historical reference for guidance, is even harder. Fortunately, there is a tax credit solution for those who started a new product, service, or business after February 15, 2020, to help alleviate the financial burden associated with lost revenue or shutdowns due to COVID-19. Eligible startups may qualify for tax credits as part of the Employee Retention Tax Credit (ERTC) Startup Recovery provision. 

The ERTC is a refundable tax credit that encourages businesses to keep employees on their payroll by innovating new products or services. It’s worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. As well, under the Recovery Startup provision, small businesses can claim up to a total of $100,000 in Q3 and Q4 of 2021.

Recovery Startup Eligibility

To encourage small businesses to invest in new business opportunities and create employment opportunities, Congress provided an Employee Retention Tax Credit for companies that have recently started a new trade or business before the end of 2021. To qualify, a business must meet both of these criteria:

  1. Began a new trade or business after February 15, 2020; and
  2. Has an average annual gross receipts of no more than $1,000,000 for the three-year period ending December 31, 2020

Maximizing PPP and ERTC

Even if you already received a second PPP loan, you can still qualify for the ERTC under the Recovery Startup provision and can combine the two for an even greater impact on your business. To maximize these tax credits, you want to make sure the PPP loan forgiveness application uses items other than employee wages that occur in Q3 and Q4 2021.

Because the ERTC Recovery Startup provision applies to wages during this time period, claiming other expenses or earlier wages for PPP forgiveness instead, is recommended. For example, you should use rent, utilities, mortgage interest, and all other non-wage-related expenses first, as well as elect the 24-week window over the 8-week option to maximize the timeframe in which non-payroll expenses can be used to qualify for forgiveness.

Recovery Startup Value

Under the Recovery Startup provision, the ERTC amount is worth 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. Under the Recovery Startup criteria, the total credit cannot exceed $50,000 per quarter, with the potential for a maximum of $100,000. A business can take this credit in Q3 and/or Q4 of 2021.

For example, if you have 8 employees making $40,000 a year, each employee will qualify for a $7,000 tax credit of $50,000 (8 x $7K, capped at $50,000) in Q3 2021. The same can also be applied in Q4 for a total of $100,000 in refundable tax credits. Refundable means the IRS will cut you a check to cover the difference if your tax liability is less than your tax credit.

Key Takeaway

If you are a small business or startup you should consider creating a new product or 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 2021. It is important to safeguard access to these tax credits with documentation. Since the IRS extended the audit window to 5 years, it is important to defend your claim covering all ERTC provisions.

Conclusion

I encourage angel investors to tell their portfolio companies to look into optimizing their ERTC and PPP loan forgiveness to maximize the funds they are eligible to receive, so they don’t leave deserved money on the table. The Recovery Startup provision is a great resource for businesses making investments in new ventures and opportunities.

If you have questions on ERTC, particularly around the Recovery Startup provision, please email at awinter@clarusrd.com or visit https://clarusrd.com/ertc/.

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