ERC Now Available to Recovery Startup Businesses

A provision in the American Rescue Plan Act of 2021 introduced two significant COVID relief enhancements that impact most small businesses. The Act extends the Employee Retention Credit (ERC) qualifying period for filing claims on qualified wages paid to the third and fourth quarters of 2021. More significantly, the Act extends claims eligibility to businesses that began operations during the COVID pandemic.

Employee Retention Credit Refresher

The ERC was one of several pandemic-related relief measures designed to assist employers and encourage them to maintain their workforces. The ERC was enacted under the CARES ACT as a fully refundable tax credit that could be claimed by employers who managed to keep employees on their payroll.

Initially, the ERC credit was equal to 50% of qualified wages paid by eligible employers between March 13, 2020, through December 31, 2020. The maximum qualified wage employers could claim per employee was $10,000, resulting in a $5,000 credit.

Qualified wages consist of compensation to employees, including health plan expenses.

The Consolidated Appropriations Act (CAA), enacted in December 2020, expanded the credit to 70% of qualified wages through December 31, 2021. The maximum qualified wage remains at $10,000, resulting in an increased tax credit of $7,000.

The CAA also increased the small employer threshold for claiming ERC on all wages paid to employees during a qualifying period from 100 to 500. That means employers with up to 500 Full-Time Equivalent (FTE) employees in 2019 can claim the ERC for 2021 on wages paid for working or non-working periods.

All employers may claim the ERC through December 31, 2021, on qualifying wages paid after June 30, 2021, and before January 1, 2022.

Expanding Eligibility to New Startups

Initially, only employers who had to fully or partially suspend operations due to a forced lockdown or experienced a significant decline in gross receipts due to COVID were eligible for the ERC. The American Rescue Plan expands eligibility to new startups established after February 15, 2020, with annual gross receipts up to $1 million. The credit is capped at $50,000 per calendar quarter.

The Act also extends eligibility to businesses that experienced a decline in revenue of 90% or more compared to the same calendar quarter from 2019. Businesses not in operation in 2019 can use a 2020 comparison for the credit.

Businesses eligible as a recovery startup are not subject to the government shutdown requirement, as are other businesses to qualify for the ERC.

For questions regarding eligibility under the American Rescue Plan as a recovery startup business or one that qualifies as "financial distressed," contact your business banker or tax advisor. They can also help you address any questions or concerns you might have regarding the Employee Retention Credit as it relates to your business before the qualifying period ends at the end of 2021.