The American Rescue Plan and ERTC
On March 12, 2021, President Biden signed into law the American Rescue Plan Act, which provides approximately $1.9 trillion in spending to address the continued impact of COVID-19. The American Rescue Plan is a followup to the CARES Act, which became law in March 2020, as well as the Consolidated Appropriations Act, which was adopted in December 2020.
The Employee Retention Tax Credit (ERTC) was expanded significantly through the Consolidated Appropriations Act to allow PPP recipients to participate in the program. This creates a compelling lookback opportunity. Plus, the Act extended ERTC through June 30, 2021 and enhanced its benefits on a go-forward basis. Businesses should take the time to understand these changes. Many companies can now benefit more from ERTC than they did from the PPP program.
The American Rescue Plan further extended the ERTC through December 31, 2021, and expanded eligibility through the recovery startup provisions. The following is an overview of the recovery startup opportunity signed into law under the American Rescue Plan.
Recovery startup opportunity
In an effort to encourage small businesses to invest in new business opportunities and create employment, Congress has provided for an Employee Retention Tax Credit for small businesses that have recently started a new trade or business and those who will do so before the end of 2021. A business must meet both of these criteria:
- Began carrying on any new trade or business after February 15, 2020; and
- Has an average annual gross receipts of no more than $1,000,000 for the three year period ending December 31, 2020
The credit amount is 70% of qualified wages paid from either the start of the new trade business or July 1, 2021, whichever is later. Qualified wages are capped at $10,000 per employee per quarter. Under the Recovery Startup criteria, the total credit cannot exceed $50,000 per quarter, with the potential for a maximum of $100,000. A business can begin taking the credit in the 3rd quarter of 2021.
What constitutes starting a new trade or business?
This concept is not well defined in the tax code. At a minimum, a business must meet the following two criteria:
- Enter into and carry on a new activity with a good-faith intention to earn a profit; and
- Engage in the new activity on a regular and continuous basis
Other factors the IRS will consider in determining if an activity represents a new trade or business:
- Are there separate books and records, facilities, locations, employees, and bank accounts?
- Are you operating separate types of businesses or activities?
- Is the new trade or business seen as separate to the public from your business?
- Are the customers of the two divisions the same or mutually exclusive?
- Does each business have requisite assets and employees for the production of income?
No single factor is definitive as to whether an activity will establish a new trade or business. However, the following example can be helpful.
A licensed plumbing contractor currently selling and installing plumbing supplies hires an employee to begin a sewer and drain cleaning offering. This new business requires additional training and specialty equipment. Although a new bank account is not established and separate facilities are not required, this new activity should represent a new trade or business.