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Qualifying as a Recovery Startup Business for the Employee Retention Credit

  • Companies can qualify as “recovery startup businesses” in order to receive funds through the Employee Retention Credit
  • The classification, created under the American Rescue Plan, is designed to assist businesses that might not otherwise meet the requirements for the credit
  • Qualifying businesses can be credited up to $50,000 per quarter for the third and fourth quarters of 2021

Summary by Dirk Langeveld

Small businesses that had the misfortune to start operations at the outset of or shortly before the COVID-19 pandemic began, or those that took a gamble and launched during the uncertain business climate in 2020, can claim an Employee Retention Credit (ERC) in the latter half of 2021 under a special designation.

The ERC allows qualifying businesses to receive funding from the federal government as a credit against employment taxes, providing an immediate source of cash. However, newer businesses often did not meet the requirements to claim this credit.

Under the American Rescue Plan, newer businesses can qualify as a “recovery startup business” and receive advance payment of employer credits for the third and fourth quarters of 2021. To qualify, a business must meet all of the following conditions:

  • Started operations after Feb. 15, 2020
  • Average annual receipts of less than $1 million for the three taxable years preceding the quarter where the credit is being claimed
  • Not otherwise qualify under other ERC criteria related to revenue losses or a suspension of operations

Companies that qualify as recovery startup businesses can receive up to $50,000 per quarter for the third and fourth quarters of 2021. The credit can be claimed by submitting the Internal Revenue Service’s Form 7200.

Businesses may potentially qualify for a larger sum under the regular ERC rules. These permit employers to claim a credit of up to 50 percent of qualifying employee wages for 2020 and 70 percent of qualifying wages per quarter for 2021, capped at $10,000. This means an employer can receive credits of up to $5,000 per employee for the entire 2020 calendar year and $7,000 per employee per quarter for 2021.

Those claiming the ERC this way must also meet other requirements, with the credits limited to smaller employees with 500 workers or fewer. Applicants must also demonstrate that they experienced financial hardship during the quarters they are applying for, suffering an annual decline in gross receipts  namely an annual decline in gross receipts of at least 50 percent for the 2020 period, a 20 percent decline in gross receipts in 2021 compared to the previous quarter or the same quarter in 2019, or a full or partial suspension of operations due to a government order.

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