How do you get Tax-Free Money? Thanks to the recently enacted American Rescue Plan Act of 2021 (ARPA), you can qualify for up to $100,000 of ERC (Tax-Free Money) in the third and fourth quarters of 2021 if you
- begin the business after February 15, 2020 (you could start today),
- have average annual gross receipts of $1 million or less, and
- do not meet either of the ERC tests—the suspended operations test or the gross receipts test—in place before ARPA was passed.
When you meet the three requirements above, you qualify as a recovery start-up business and, as such, can claim an ERC of up to $50,000 in both the third and fourth quarters of 2021.
It works like this: your recovery start-up business ERC is equal to 70 percent of the qualified wages paid to each employee (up to $10,000 per employee per quarter), with an overall maximum credit of $50,000 per quarter.
Recovery Start-Up Business Example
In May 2021, you start a new retail store as a sole proprietorship business.
For the third quarter of 2021, your total ERC is $17,640:
You have three employees who were paid $8,400 each during the quarter. No employee exceeds the $10,000 wage maximum for the quarter.
Total qualified wages for the ERC are $25,200 ($8,400 x three employees). Your credit is 70 percent of $25,200, or $17,640.
For the fourth quarter of 2021, your total ERC is $20,440:
You have three employees who were paid $8,400 each during the quarter, and one employee who was paid $4,000 during the quarter. No employee exceeds the $10,000 wage maximum for the quarter.
Total qualified wages for the ERC are $29,200 ($8,400 x three employees + $4,000 for the parttime employee). Your credit is 70 percent of $29,200, or $20,440.
For tax year 2021, you receive total employee retention tax credits or Tax-Free Money of $38,080!
One Wrinkle To Keep In Mind
But you need one more step to calculate your net benefit. You can’t deduct wages in tax year 2021 equal to the ERC earned during the tax year; therefore, your net business income increases by $38,080 for tax year 2021.
Takeaways
ARPA added a big incentive for starting a new business. It works like this: your business can qualify for the ERC on 70 percent of the qualified wages paid to each employee (up to $10,000 per employee for each of the last two quarters of 2021), with an overall maximum credit of $50,000 per quarter.
To qualify for the third- and fourth-quarter ERC incentives, your business had to begin after February 15, 2020.
The big deal with the two quarters of 2021 is that your business has to be new, but it does not have to suffer from COVID-19 stresses. In fact, it can’t qualify for the recovery start-up business special deal if it otherwise qualifies under the suspended operations test or the gross receipts test.
If you are thinking of starting a new business this year and would like to discuss the possible benefits of this Tax-Free Money, please call me on my direct line at 509-543-7600 or send a request HERE.
May 2021
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