The Employee Retention Credit (ERC) is a tax credit that can be claimed on quarterly payroll tax filings. It was originally introduced as part of the CARES Act in 2020 to provide financial support to business owners who have been impacted by the COVID-19 pandemic. The American Rescue Plan Act of 2021 expanded the ERC to include "recovery startup businesses," which are businesses that started during the pandemic and meet certain eligibility requirements.
To qualify as a recovery startup business, your business must have started on or after February 15, 2020, have annual gross receipts of $1 million or less for the 2020 and 2021 tax years, and have at least one W2 employee who is not an owner-operator or family member. For example, if you started a food delivery business in April 2020 with three employees and earned $500,000 in total for the 2020 and 2021 tax years, you would be considered a recovery startup business and eligible for the ERC.
If you started your business in the second quarter of 2021 or later, you may not be able to claim the ERC for 2020 or the first two quarters of 2021. However, if you meet certain criteria related to revenue reduction or government restrictions, you may be able to claim the credit for earlier quarters. If you purchased an existing business that was in operation before February 15, 2020, your eligibility for the ERC may depend on your specific circumstances. It is recommended to seek the guidance of ERC tax experts to determine if you qualify for the credit.