Recovery Startup Businesses and the Employee Retention Credit

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The Employee Retention Credit (ERC) has been a lifesaver to many businesses affected by the pandemic. With the passing of the federal CARES Act the ERC was enacted back in March 2020. Businesses that had a reduction in sales in 2020 and 2021 when compared to 2019 could receive a payroll tax credit up to $7,000 per employee per quarter depending on when the reduction in sales occurred. The ERC was amended, and some eligibility requirements changed since it was enacted with CARES; with the signing of the Infrastructure Investment and Jobs Act (Infrastructure Bill) the ERC again changed.

The credit has effectively been eliminated for fourth quarter 2021 wages – except for a “Recovery Startup Business.”

To determine the amount of credit available, and eligibility in the first case, we first need to define what a “recovery startup business” is.

IRS Notice 2021-49: Additional ERC Guidance and Clarification (August 10, 2021) states that a recovery startup business is an employer that:
(1) Began carrying on any trade or business after February 15, 2020. And
(2) Using similar rules under section 448(c)(5) for which the average annual gross receipts of the employer for the taxable-three-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000. And
(3) Is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.

To make sense of what the code is saying here, a business that began after February 15, 2020, will have under $1,000,000 in annual sales, and is not otherwise eligible because of required suspension of business operations (alternative eligibility due to shutdown or partial suspension may apply) could claim the ERC on its Q3 and Q4 2021 Form 941. This is a special provision for the aspiring entrepreneurs who decided to open a small business in one of the toughest economic conditions in recent history.

The amount of credit is calculated the same way as other businesses that qualified under the reduction of sales. The credit can be up to 70% of eligible wages for qualified employees, maxing out at $7,000 per employee per quarter. The total amount of the credit cannot exceed $50,000 per quarter as a recovery startup business.

If you have any questions about whether you could and should apply for the ERC as a recovery startup business or what discontinuing the ERC for all others means for your business, please contact one of the JCCS offices.

* This article is not a complete listing of all the details related to this tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.

Photo: Mike Petrucci,