Recovery Startup Business Owner putting up closed sign to show shutdown due to ERC-qualifying scenario.

Navigating ERC Eligibility for Recovery Startup Businesses in Q3 and Q4 of 2021

May 15, 2024

The Employee Retention Credit (ERC) has been a lifeline for many businesses grappling with the long-term impacts of COVID-19. As a refundable tax credit, the ERC provides up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. This substantial size of this financial relief has made the ERC one of the most-discussed tax incentives in recent years. In this article, we‘ll focus on an often-overlooked aspect of the ERC: Recovery Startup Businesses (RSBs). While the Infrastructure Investment and Jobs Act disallows most businesses from claiming the ERC after September 30, 2021, RSBs can still claim the credit for Q3 and Q4 of 2021.

Understanding Recovery Startup Businesses

A Recovery Startup Business (RSB) is defined by the IRS in Notice 2021-49 as an employer that:

  1. Started carrying on their trade or business after February 15, 2020
  2. Has average annual gross receipts averaging under $1 million for the three tax years preceding 2021

Calculating Gross Receipts for RSBs

For businesses that started in 2020, calculating the three-year average of gross receipts may seem challenging but it is doable. First, divide the gross receipts by the number of months the business was in operation during 2020. Next, multiply the result by 12 to annualize it. This will provide the average amount of gross receipts for the year.

What is the maximum ERC amount for RSBs?

RSBs can receive up to $7,000 per employee per quarter, with a maximum of $50,000 per quarter for Q3 and Q4 of 2021.

Do business acquisitions and mergers qualify as RSBs?

While the IRS has not provided specific guidance on acquisitions, mergers, or spin-offs, the tax code states that an acquired business is considered as starting on the date of the acquisition. Such businesses would likely be eligible for the ERC as an RSB if the event occurred after February 15, 2020, and all other RSB requirements are met. However, RSB eligibility may vary, and it is essential to consult with a tax professional and provide them with your supporting documentation.

Interested in getting the ERC? Contact us today!

Claiming the ERC as an RSB can be complex due to the nuances of eligibility requirements and calculations. Whether you qualify as an RSB or fall under general ERC eligibility, it is important to act quickly, as the ERC will begin to expire in 2024. If you want to explore your ERC eligibility, contact us and we’ll help you determine the amounts for which you’re eligible and help you claim it.