The Employee Retention Credit (“ERC”) has become a significant source of refundable tax credits for pandemic-affected businesses. The original rules of the program had many businesses who opened during 2020 feeling left out, when it was difficult to meet some of the eligibility criteria. However, through the American Rescue Plan Act of 2021 (“ARPA”), Congress has opened the door for many of these businesses to qualify for ERC, at least for Q3 and Q4 of 2021.
As discussed in more detail here, Congress extended and expanded the breadth of the ERC through December 31, 2021. Most of the changes enacted were favorable to businesses, creating eligibility in 2021 for many businesses who weren’t eligible during 2020.
One subset of beneficiaries are those employers that qualify as a recovery start-up business (“RSUB”), which was added to the definition of an eligible employer for Q3 and Q4 of 2021. An RSUB is any employer that meets all of the following:
- Began carrying on any trade or business after February 15, 2020
- Had average annual gross receipts for the 3-year preceding period of less than $1,000,000
- Does not qualify for the ERC under either the partial shutdown of operations or reduction in gross receipts criteria
An RSUB is permitted to claim the ERC for Q3 and Q4 of 2021, subject to a cap of $50,000 per quarter, with a maximum potential benefit of $100,000. A subtle nuance to consider is the third bullet above. This is because if an employer that would otherwise qualify as an RSUB could qualify as an eligible employer under the standard ERC rules, they would not be considered an RSUB, thus providing a path to credit without the imposed $50,000 limitation per quarter.
Let’s discuss some examples:
Example #1 – RSUB with no ERC limit
Company A began operating a trade or business on March 1, 2020 and had gross receipts of $850,000 during 2020. Company A does not qualify for the ERC under any other criteria. Company A retains four employees, each of which are paid $15,000 per quarter.
Company A would be permitted to claim the ERC for Q3 and Q4 of 2021. Each employee would generate a credit of $7,000 per quarter ($10,000 of eligible wages per employee x 70%), totaling a credit of $28,000 per quarter, or $56,000 total Q3 and Q4. Because the $28,000 earned per quarter is under the cap of $50,000, Company A would receive the full amount of $56,000.
Example #2 – RSUB with ERC limit
Taking the same fact pattern as above, but instead of four employees, Company A has 10. In this event, Company A would calculate a credit of $70,000 per quarter but would be capped at $50,000. In total between Q3 and Q4, Company A would receive $100,000.
What Are the Next Steps?
The logical next question for businesses who will qualify is how do they access the funds? To claim the credit, eligible businesses can withhold required deposits for certain payroll taxes – credits in excess of the businesses’ quarterly liability could either request a refund or a credit to be carried forward on their original, timely filed quarterly 941. For those businesses who have determined their eligibility after the original filing of the Form 941, an amended payroll tax return would be required to be filed, which would include a request for a refund for the credit amount. The calculation of the employee retention credit can be complex, especially when considering the period of eligibility, overlap with other federal programs and determining which wages are deemed eligible for the ERC.
Author: Jeffrey A. Clayman, CPA, JD, LLM
SBA Financial Assistance Services