Written by Cassidy Jakovickas CPA
Chances are, you already know about the Employee Retention Credit by now, but in case you haven’t, here’s a quick recap. The Employee Retention tax credit (also called ERC or ERTC) is a refundable tax credit introduced in 2020 to relieve the impact of COVID-19 on employers. If you qualify for the ERC, you can get up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. Even for small businesses, those numbers add up quickly, which is why the ERC is one of the most-discussed tax incentives in recent years. If you want a quick refresher on the ERC, read my previous article, “Are you overlooking the Employment Retention Tax Credit opportunity?”
If you’re already familiar with the ERC, however, I’d like to discuss a topic that has been largely ignored by most firms offering ERC tax credit services: Recovery Startup Businesses (or RSBs). Thanks to the Infrastructure Investment and Jobs Act, the ERTC now ends on Sept. 30, 2021 for most businesses. However, for employers who qualify as RSBs, the ERTC is available between July 1, 2021 and Dec. 31, 2021. So, what is an RSB and how can you determine if you’re able to claim the ERTC in the third and fourth quarters of 2021?
Defining A Recovery Startup Business
In Notice 2021-49, the IRS provides clarity on the definition of a Recovery Startup Business, listing that an RSB employer must:
- — Have started carrying on their trade or business after Feb. 15, 2020
- — Have average annual gross receipts averaging under $1 million for the three tax years preceding 2021
- — Not be otherwise eligible for the ERTC due to suspended operations or a gross receipts decline
As a Recovery Startup Business, you’re eligible to receive up to a maximum of $50,000 of ERC per quarter in the third and fourth quarters of 2021. The RSB requirements are relatively straightforward, but there are some questions that can arise as you check your eligibility.
How can I calculate three tax years of receipts if I started in 2020?
Obviously, if an RSB started on or after Feb. 15, 2020, and has a calendar-based year end, its preceding “three-year period” for 2021 will only have gross receipts for the 2020 tax year between Feb. 16, 2020 and Dec. 31, 2020. So, if your RSB started operating on July 1, 2020 and had gross receipts through Dec.r 31, 2020 totaling $254,000, you could calculate your gross receipts as follows:
- — $254,000/6 months = $42,333 average per month
- — $42,333 x 12 = $508,000
- — $508,000 is the average gross receipts for the year
In the above example, we divided the gross receipts by the amount of time in business (6 months), then multiplied the result by 12 to annualize it. If I were to put this in a formula for you, I’d do:
- No. 1: Gross receipts for year/time in business = monthly average of gross receipts
- No. 2: Monthly average of gross receipts x 12 months = annualized average of gross receipts
- No. 3: The result is the average amount of gross receipts for the year
The “not otherwise eligible” rule for Recovery Startup Businesses
It’s important to remember that a Recovery Startup Business cannot be otherwise eligible for the ERC due either to a government-mandated shutdown or a decline in gross receipts in 2020 or 2021. This protection was put in place to prevent double-claiming the ERC using the same wages.
However, this should not pose a problem since the Infrastructure Investment and Jobs Act removed the ability for non-RSB businesses to qualify for ERC in the fourth quarter of 2021 through the suspension test or decline in revenue test.
What is the maximum that RSBs can receive from ERC?
If you qualify as an RSB, you can receive up to $7,000 per employee per quarter, with a maximum of $50,000 per quarter for the third and fourth quarters of 2021.
What about a business acquisition or merger?
Although there is no specific guidance from the IRS on acquisitions, mergers, or spin-offs, the tax code does state that an acquired business is considered as starting on the date of the acquisition. It’s very likely that an acquisition or similar scenario would be eligible for the ERC as an RSB, provided that the event occurred after Feb. 15, 2020, and all other RSB requirements are met. However, RSB eligibility can differ for an organization and, ultimately, eligibility should only be considered final if your circumstances have been reviewed by a tax expert and validated with supporting documentation.
Are you ready to claim the ERTC as an RSB?
If you’re interested in claiming the ERC tax credit as an RSB, I’d highly recommend discussing your situation with a tax professional. There are many nuances to the ERC, particularly when determining RSB eligibility, that require due diligence and extensive knowledge of tax laws and regulations. But, whether you qualify as an RSB or fall under the general ERC eligibility, I’d highly recommend checking your ERC eligibility soon – the ERC starts to expire in 2023.
Cassidy Jakovickas, CPA, is president and CEO of MBS Accountancy Corp. in Downtown Fresno.