Tax credits for businesses that opened during COVID-19

The American Rescue Plan Act (ARPA) of 2021 expanded the Employee Retention Credit (ERC), a key tax provision in the recent series of COVID-19 legislation, to include new businesses that opened their doors after Feb. 15, 2020. This credit, which comes with very few measures outside of a business start date, can provide up to $100,000 in credits for 2021.

Key provisions of the ERC for 2021

First introduced in the CARES Act, the ERC has undergone a few revisions with the recent Cororanavirus Response and Relief Supplemental Appropriations Act (CRA) of 2021 and ARPA. Eligible employers may now claim credits of up to 70 percent of the first $10,000 in wages paid per employee, per quarter, for every quarter of 2021.

An eligible employer must meet one of the following criteria:

• Trade or business operations are fully or partially suspended in the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
• Gross receipts for the calendar quarter are less than 80 percent of the gross receipts for the same calendar quarter in 2019 – or 2020 if the business did not exist in 2019 – or using an allowable alternative quarter.

Wages that qualify depend on the size of the employer:

• Not more than 500 employees, measured in 2019, and including all wages paid. 
• More than 500 employees, measured in 2019, and including wages paid to an employee who is not providing services.

Another notable change, included in the CRA, was the retroactive removal of the requirement that employers claiming ERC credits could not have a paycheck protection program (PPP) loan. Currently, PPP loans do not prohibit ERC eligibility, other than the requirement that no wages paid for with PPP funds should be included in the credit calculation.

New businesses

ARPA also created a new category of eligible employer for purposes of the ERC: the recovery startup business. 

To be an eligible recovery startup business, an employer must have the following:

• Began carrying on a trade or business after Feb. 15, 2020.
• Not have average annual gross receipts for the 3-year period ending with the preceding taxable year exceeding $1 million (as defined similar to Sec. 448(c)(3) rules, which gives guidance on shorter periods and partial years).
• Doesn’t otherwise qualify due to a suspension in operations or a significant reduction in gross receipts (as defined in the previous section).

Recovery startup businesses are allowed to claim the ERC for Q3 and Q4 of 2021, subject to a cap of $50,000 per quarter, with a potential benefit of $100,000 for the year. It’s important to note that startup businesses may also otherwise qualify for the ERC. For example, they may qualify if they are subject to a full or partial government shutdown. Qualifying under the non-startup ERC criteria would allow a potentially larger credit, not subject to the cap.

It’s worth a look!

Because many businesses will qualify for the ERC in 2021, tax professionals should advise their clients any business with employees should at least take the time to explore eligibility. In addition, as we approach Q3 and Q4 of 2021, it’s important to note, and communicate, that new businesses – those , that those that started a business and hired workers during COVID-19 – may also qualify.