Expanded ERC Eligibility for Startup Companies

Did You Start a Company in 2020 or 2021? You May Still Qualify for the ERC!

For many businesses hit hardest by the coronavirus pandemic, the Employee Retention Credit (ERC) was a lifeline for continued operations. Unfortunately, that door slammed shut for many businesses looking to take advantage of the credit in Q4 2021. Introduced in March 2020 as part of President Biden’s $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC allowed more than 30,000 businesses to claim over $1 billion in its first full year according to the Biden Administration.

The new Infrastructure Investment and Jobs Act, signed into law in November 2021, retroactively ended the ERC on September 30, 2021 for businesses that previously qualified. Now only a small percentage of businesses that previously did not qualify can earn up to $100,000 in the form of a tax refund from the IRS. Is your business one of the lucky ones? If yes, how do you know? If not, what can your business do?

Here’s what you need to know:

Who qualifies?

While the ERC was originally extended and expanded multiple times through the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act, the IRS issued final guidance that eliminated the credit for Q4 2021 for businesses that would have qualified under the existing requirements. According to the IRS website, the amendments resulted in eligibility for recovery startup businesses to take the ERC for both Q3 2021 and Q4 2021, up to a total of $50,000 per quarter.

What’s a recovery startup business?

“Recovery startup businesses” are defined as any employer:

1. Which began carrying on any trade or business after February 15, 2020
2. That has 1 or more employees other than >50% owners and certain family members
3. For which gross receipts are less than $1 million dollars for both 2020 and 2021 each
4. That was not eligible for ERC under the existing requirements, i.e., businesses had to have a significant decline in gross receipts or were subject to a governmental shutdown

What can recovery startup businesses claim?

For businesses that do qualify as recovery startups, continued eligibility under the ERC will allow them to save approximately $7,000 per employee, assuming they pay at least $10,000 or more to the employee during the eligible time period, up to $50,000 per quarter.

Final Thoughts

The benefits outlined above for recovery startups are great news for those that may not have previously qualified. It’s always possible that new laws could reinstate the ERC for businesses that missed out on Q4 — the pandemic isn’t over yet. However, businesses that are not recovery startups should settle into the fact that their ERC eligibility is a thing of the past. Those who already submitted Form 7200 to request an advance payment of the ERC but no longer qualify should reach out to experts at Clayton & McKervey about next steps. If your business remains eligible, it is imperative that you properly file to claim your ERC credit in what may be the final quarter of eligibility for all businesses.