The IRS will subsidize the cost of your employees thanks to legislation passed earlier this year. The Employee Retention Credit (ERC) was passed as a Covid 19 relief measure to help employers who were not eligible to receive PPP. However, the American Rescue Plan changed some key provisions regarding the ERC. For this article we will cover Recovery Start Businesses provision.
The American Rescue Plan once again extended the ERC to wages through December 31, 2021. The ERC was also strengthened in the American Rescue Plan. These rules are only applicable to wages paid in the third or fourth quarters 2021, as none of these changes were retroactive.
The American Rescue Plan introduced a third category for eligible employers: recovery start-up businesses. A recovery startup company is generally one that was founded after February 15, 2020 and has annual average gross receipts of less than 1 million, and is otherwise not eligible under other ERC criteria. The new category includes additional employers, however, recovery startups businesses will only be eligible for $50,000 in ERC in the third quarter 2021 and $50,000 in the fourth quarter 2021.
For example, if you start a business on July 1, 2021 and pay 7 employees $10,000 for the third and fourth quarter of 2021 the IRS will give you $98,000 in the form of an ERC. The credit is 70% for the eligible wages paid. One caveat is that you can’t deduct the expense.
Also, consider these two issues when deciding if this is good for your business:
- The wages you paid using the ERC must be deducted by the amount of the credit claimed when calculating your taxable income.
- The IRS has not clarified whether the Employee/owners wages qualify for the ERC, but has not specifically disallowed those wages either.
If you would like to discuss this or any other areas where we can help your small business we will be happy to help.