Much of the focus regarding the Employee Retention Credit (“ERC”) has been on businesses that suffered qualifying declines in gross receipts or were subject to a partial suspension of operations. There is, however, another way for certain businesses to qualify for ERC. These businesses, referred to as Recovery Startup Businesses, are eligible for a special carve-out of the ERC, which could result in a maximum credit of $100,000.
The American Rescue Plan Act of 2021 provided some clarifications and modifications to what qualifies for ERC. In relation to Recovery Startup Businesses, the legislation outlined that a qualifying business is one in which:
- Operations began on or after February 15, 2020, and
- Average annual gross receipts do not exceed $1 million
If your business fits the criteria above and you have 1 or more employees (excluding owners and certain relatives), and you do not qualify for the ERC under either the gross receipts or partial suspension tests, you are eligible. The maximum credit is capped at $7,000 per employee, up to $50,000 per quarter, for Q3 and Q4 2021.
Note that the Infrastructure Investments and Jobs Act passed in November 2021 eliminated ERC for most businesses in Q4 2021. However, there was a specific exception for Recovery Startup Businesses, which are still eligible in Q4 2021.
It is important to note that while this may be the best option for some new businesses, it won’t necessarily be the best option for all. A business that began in 2020 that fits the 2 criteria above may be able to maximize their benefit by applying the clarified rules for businesses that were not in existence in 2019. This allows a comparison of quarterly gross receipts in 2021 to the same calendar quarter in 2020 to determine qualification under the gross receipts test. As such, it is important to consult an advisor to determine the best option for your company. Please reach out with any questions.
If there’s anything above you’d like to discuss further, please contact us.