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You are here: Home / employee retention credit / Recovery Startup Business Employee Retention Credit

Recovery Startup Business Employee Retention Credit

August 4, 2021 By Stephen Nelson CPA

The recovery startup business employee retention credit can provide up to $100,000 in funding to a small business entrenrepeur.For the third and fourth quarters of 2021, tax law provides an unusual incentive to small business entrepreneurs: the recovery startup business employee retention credit.

You want to learn about this bit of federal government largesse. If you’re an entrepreneur. Or if you’re a small business owner. Because it’s nearly unbelievable.

But in a nutshell? The federal government will give you up to $100,000 for paying your employees if you’ve started a new trade or business.

The Actual Statute

Let’s look at the actual Section 3134(c)(5) language. Because that rather clearly gives you the lay of the land.

Here’s the law Congress wrote and passed and which the President signed:

(5) Recovery startup business

The term “recovery startup business” means any employer-

(A) which began carrying on any trade or business after February 15, 2020,

(B) for which the average annual gross receipts of such employer (as determined under rules similar to the rules under section 448(c)(3)) for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined under subsection (a) does not exceed $1,000,000, and

(C) which, with respect to such calendar quarter, is not described in subclause (I) or (II) of paragraph (2)(A)(ii).

That’s it.

So, to summarize? A trade or business you start after February 15, 2020.

A situation where the employer’s average annual gross receipts do not exceed $1,000,000.

Finally, a situation where the employer would not qualify for employee retention credits under the usual rules. Those usual rules? Revenues less than 80 percent as compared to the same quarter of 2019. Or government orders closing the business either fully or partially.

Note: We most recently discussed the “usual” qualification rules for employee retention credits here: Solving the Employee Retention Credit Partial Suspension Puzzle. And for the record, you would want to use the usual rules if you could, because they’re even more generous if you qualify.

Example of Trade or Business Started After February 15, 2020

Let me give you a couple of examples of trades or businesses started after February 15, 2020.

Example 1: You open a restaurant on February 16, 2020. In this case you qualify. Note that had you opened one day earlier? You would not qualify.

Example 2: You operate an accounting firm and prepare people’s taxes. So that’s one trade or business. But on August 15, 2021, you open an equestrian center. Which represents another trade or business. You do qualify for the credit potentially because you began carrying on a trade or business (the new equestrian center) after February 15, 2020.

Example of Gross Receipts Limitation

The statute limits the recovery startup business employee retention credit. Only businesses with average annual gross receipts of $1,000,000 or less for the three previous years qualify.

If you have less than three years of operation, you look only at the years you operated.  (This is why the law quoted above references Section 448(c)(3).)

Some examples show how this works.

Example 3: The fictional restauranteur from Example 1 generated zero revenue in 2018 and 2019 but $300,000 of revenue in 2020. His three-year average, therefore, equals $300,000 . Because ($300,000)/1 year equals $300,000. And, obviously, $300,000 “does not exceed $1,000,000.” Accordingly, he qualifies.

Example 4: The fictional tax accountant faces a more complicated situation. Following a rule specified in Section 3134(d), she needs to aggregate the gross receipts from the businesses she operates. But say the tax accounting firm generated $400,000 in 2018, $800,000 in 2019, and $1,200,000 in 2020. Further suppose the equestrian center generated zero revenue in 2018, 2019 and 2020. Because it only starts in 2021. In this case, the average gross receipts for the three years equals $800,000 because ($400,000+$800,000+$1,200,000+$0+$0+$0)/3 years equals $800,000. And because $800,000 “does not exceed $1,000,000,” she qualifies.

The Recovery Business Startup Employee Retention Credit Limit

One final thing to mention.

The usual employee retention credit in 2021 equals seventy percent of up to the first $10,000 an employer pays employees.

Example 5: An employer with ten employees who each earn $10,000 a quarter might receive $70,000 of employee retention credits, assuming she, he or they qualify. Note that if the employer paid each of these ten employees $15,000 for the quarter, the credit doesn’t increase in size. The formula only looks at the first $10,000 in wages an employee earns, giving the employer a credit equal to seventy percent of this amount.

The recovery business startup employee retention credit formula limits the benefit, however.

Quoting the statute, the credit “for any quarter, shall not exceed $50,000.”

Example 6: If the employer described in Example 5 doesn’t qualify for the usual employee retention credits but does qualify for a recovery startup business credit, the credit equals $50,000.

Note, too, that the credit only works for the third and fourth quarter of 2021—so two quarters.

But still, think about that. $100,000 is lot of money. You want to keep your eyes open for new trades or businesses you can start…

Other Resources

Here’s the full statute that creates the recovery startup business employee retention credit: 26 USC 3134: Employee retention credit for employers subject to closure due to COVID-19

IRS Notice 21-49 provides the only additional guidance on the recovery startup business credit (see pages 6 through 11) and it’s available here.

Maximizing Employee Retention Credits

If you realize some of your staff need more training about how the employee retention credits work, no problem. We’ve got economical $14.95 paperback book that represents a great way for staff, managers and partners to learn how employee retention credits work: Maximizing Employee Retention Credits.

Finally, we’ve also got a number of related articles and blog posts about the employee retention credit and many may be useful for folks still getting up to speed.

 

 

 

 

Filed Under: employee retention credit, management, New business, Strategy

Reader Interactions

Comments

  1. Omar says

    August 4, 2021 at 7:24 pm

    Could you start another business and hire your self and your spouse for Q3 and Q4 if you already are employed by your own separate S Corp that is an already established business? Could this business provide services to your ineligible S Corp?

    • Stephen Nelson CPA says

      August 5, 2021 at 6:42 am

      I think you can start another business and have your aggregated businesses possibly qualify as a recovery startup business. But keep in mind something that Dan Chodan explained here, Owner Wages and the Employee Retention Credit… You don’t get the credit for owners nor or family employees.

      BTW, this accounting treatment was fully spelled out by the IRS in a notice that they pulbished yesterday as or after I posted this blog post: IRS Notice 21-49.

  2. Jeff says

    August 5, 2021 at 6:19 pm

    If you just started the business after feb 15 2020
    How do you have average gross receipts for 3 years
    Suppose u youstarted February 26 2020 through 12/31 you make 2500000 in that first short year
    Could you qualify?

    • Stephen Nelson CPA says

      August 10, 2021 at 8:08 am

      Great question. And a firm in situation you describe probably fails to pass the “not more than $1,000,000 in gross receipts.”

      I think the $2,500,000 for ten months (basically) gets reset to $3,000,000 for the 2020 year. And then because you don’t have three years to average but only one, that sets your (basically) one year average to $3,000,000. That’s more than $1,000,000. Which means you fail to qualify.

      The precise recipe for making this short year adjustment comes from Section 448(c)(3)(B), which says this:

      (B)Short taxable years
      Gross receipts for any taxable year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.

      BTW, the other thing to check, though, is that you don’t have another trade or business which gets aggregated with the new business. Why? Well, if that business operated in 2018 and 2019 and shows modest gross receipts that might pull down your average to under $1M per year.

      E.g., say in 2018 and 2019 you have a little Schedule C sole proprietor thing. Maybe sideline consulting. Annual revenues $10K a year. If that’s case, now your
      “average three years of revenue” formula looks like this:

      ($10,000+$10,000+$2,5000,000)/3 years equals $840,000. And now you qualify.

  3. Gabriel says

    August 6, 2021 at 9:17 am

    “An employer with ten employees who each earn $10,000 a quarter might receive $100,000 of employee retention credits”

    Wouldn’t that be $70,000 of employee retention credits, due to the seventy percent rule?

    • Stephen Nelson CPA says

      August 10, 2021 at 7:58 am

      Yes. Sorry. Fixed. Thank you.

  4. Morgan says

    August 8, 2021 at 6:29 pm

    Steve,

    I used the email form as suggested to ask about your firm looking over our books for the Employee retention credit. I haven’t heard back yet. Do you know if someone is working on contacting us?

    • Stephen Nelson CPA says

      August 10, 2021 at 8:11 am

      We are providing ERC consulting help. I didn’t see your email message come in the usual way, however. Sorry!

      I have just sent you an email privately though…

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