Is Your Business Eligible for the Employee Retention Credit under the New “Recovery Start-Up Business” Provision?

The American Rescue Plan Act of 2021 enacted in March 2021 added the “Recovery Start-Up Business” provision so that a new business that could not get the benefit of the Employee Retention Credit (ERC) under the CARES Act or the Consolidated Appropriations Act, may now qualify for up to $100,000 in refundable payroll tax credits.

To qualify for the “Recovery Start-Up Business” provision, a business:

• Must have begun operations after February 15, 2020
• Must have average annual gross receipts of $1 million or less as follows:
  • Businesses started after February 15, 2020 with their initial taxable year ending DURING 2020 must annualize their 2020 gross receipts and include receipts of affiliates with common control.
  • Businesses started after February 15, 2020 with their initial taxable year ending AFTER 2020 with no common control affiliates will automatically pass the $1 million gross receipts test.
• Does not meet either of the Employee Retention Credit tests:
  • Suspension of operations test, or
  • Gross receipts reduction test

As such, all businesses that started operations after February 15, 2020 and meet the criteria above qualify for an Employee Retention Credit of up to $50,000 per quarter for the 3rd and 4th quarter of 2021.

The Credit is calculated by multiplying 70% of qualified wages (up to $10,000 per quarter) per employee, with an overall credit maximum of $50,000 per quarter. This payroll tax credit is taxable and the same wages can’t be used for this credit, PPP loans or other credits.

To illustrate, see the following example of a business that:

• Started business in April 2021
• Has under $1 million in gross receipts, as discussed above
• In Quarter 3 of 2021, has:
  1. 5 employees making $2,500 per month
  2. 2 Employees making $5,000 per month
  3. Total qualified wages of:
     • $37,500 ($2,500 x 3 months) x (5 employees)
     • $20,000 ($5,000 x 3 months) x (2 employees) (capped at $10,000 per employee)Total qualified wages = $57,500
  4. Total Credit for Quarter 3 of 2021
     • $40,250 ($57,500 x 70%)

If you have the same payroll for the 4th quarter, you can take the payroll tax credit again, totaling $80,500 in cash for a start-up company that can help grow the business and support operations.

If your business is a pandemic start-up, you’ll want to make sure you maximize all of the relief options available to you. If you have any questions on the refundable payroll tax credit of the “Recovery Start-up Business” provision, and / or other relief programs, please contact: Joseph Molloy, CPA; Chris Noble, CPA, Practice Leader, Technology Group; our Anchin COVID-19 Resource Team at  [email protected]; or your Anchin Relationship Partner.