Limited Time Left to Claim Overlooked COVID-19 Tax Credit for Businesses Established in 2020 and 2021

November 28, 2023  |  4 min read

Did your company begin operations between February 15, 2020, and December 31, 2021? Did your business also have W-2 payroll expenses between July 1, 2021, and December 31, 2021?

If the answer to these two questions is yes, you may be eligible for up to a payroll tax credit of up to $100,000 as a Recovery Start-up Business under the American Rescue Plan Act (ARPA).

Understanding the “Original” Employee Retention Credit (ERC)
By now, many business owners and C-suite executives have heard about the Employee Retention Credit (ERC) amid the flurry of aggressive advertising campaigns and IRS warnings. Originally released in March 2020 as part of the CARES Act, the ERC was ultimately meant to reward businesses that retained employees during 2020 and the first three quarters of 2021, despite experiencing a loss of revenue and/or a partial or total shutdown of their businesses due to governmental orders. Of note, the ERC in its original form required one of these two “eligibility tests” to be met, which can be extremely subjective in nature and subject to abuse.

Opportunity for “New” Businesses: Recovery Start-up Businesses (RSB)
While the initial focus on ERC eligibility centered around established businesses, the government later acknowledged that new businesses formed during the COVID-19 pandemic were significantly affected by government restrictions. Arguably, these ventures also deserve recognition and reward for their courage in launching amid the challenging circumstances.

In response, the ARPA of 2021 introduced changes to the ERC, extending its benefits to a new category of recipient known as the “Recovery Start-up Business” or an “RSB”. Perhaps the most notable distinction between an RSB and any other business seeking an ERC refund is that the former can automatically qualify for the relief without having to refer to an eligibility test, as described above.

More specifically, the ARPA defines an RSB as a business that:

  • Began or acquired new operations on or after February 15, 2020;
  • Had an average annual gross receipts that are less than $1 million in 2020;
  • Had one or more W-2 employees, excluding majority owners (50% or more individual owners) and their related parties; and
  • Paid wages to W-2 employees in Q3 and/or Q4 of 2021.

Businesses that qualify as an RSB can claim up to $50,000 per quarter for each of Q3 and Q4 2021 (i.e., $100,000 total). Note, an RSB is the only eligible category of business that can claim ERC in Q4 2021.

Further Opportunities and Comparisons
As noted above, RSBs do not need to prove a significant decline in revenue or a full or partial suspension of operations to receive this credit in Q3 and Q4 2021, rather, they need only to meet the eligibility requirements listed above. However, to the extent an RSB had a significant decline in revenue or a full or suspension of operations, an RSB may use the ERC’s normal limits (i.e., $5,000/employee in 2020 or $7,000/employee in 2021, with no cap) to request an ERC for Q2 2020 through Q3 2021 (while Q4 2021 ERC remains capped at $50,000 total for the entire business).

When testing whether an RSB had a significant decline in revenue for any 2021 quarter, new businesses can use 2020 revenue numbers to determine their eligibility for this credit when comparing to the same quarters in 2021. This differs from other businesses that have to use 2019 numbers when comparing to the same quarters in 2021 to determine whether there was a significant decline in revenue for 2021 for purposes of the ERC.

Expert Guidance is Available through Sagemont Tax
Just like every aspect of the ERC, there are many nuances and requirements to file an accurate claim. Our team of ERC experts is well-versed in the intricacies of COVID-19-related legislation and can guide you every step of the way. Reach out today for a complimentary, commitment-free consultation. Given the limited history of the ERC, it is critical to consult with highly qualified tax and legal professionals to determine ERC eligibility and file a legitimate claim for the credit.

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