Business Recovery Credit: Who Qualifies and How to Claim

The Business Recovery Credit is a component of the Employee Retention Credit (ERC) established under the American Rescue Plan Act to support newer companies. It was designed for businesses that began operations during the COVID-19 pandemic and may not have qualified for the broader ERC. The credit is a refundable payroll tax credit for the third and fourth quarters of 2021.

Determining Eligibility as a Recovery Startup Business

To qualify as a recovery startup business, an employer must meet a set of criteria. The first is that the business must have commenced operations on or after February 15, 2020. This start date is a cutoff intended to isolate businesses established during the pandemic.

Another condition relates to earnings, as the business’s average annual gross receipts must not have exceeded $1 million. For businesses not in existence for the full three-year lookback period prior to 2021, the gross receipts are annualized to determine eligibility. This cap directs the credit toward smaller enterprises.

The final requirement is having one or more W-2 employees. Wages paid to majority owners (more than 50% ownership) and their family members are not considered for this requirement or when calculating the credit. Unlike the general ERC, a recovery startup business does not need to demonstrate a suspension of operations or a significant decline in revenue.

Calculating the Credit Amount

The credit amount is determined for the third and fourth quarters of 2021. The credit is calculated at a rate of 70% of an employee’s qualified wages paid during a qualifying quarter.

“Qualified wages” include salary, hourly pay, and certain health plan expenses paid by the employer. The amount of wages that can be considered for the credit is capped at $10,000 per employee for each eligible quarter. This means the maximum credit an employer can generate per employee is $7,000 per quarter.

There is also a cap on the total credit a recovery startup business can claim, which is limited to $50,000 per calendar quarter. For example, if a business has a potential credit of $70,000 for the third quarter of 2021, it could only claim $50,000. This results in a total potential credit of up to $100,000 across both quarters.

How to Claim the Credit

To claim the Business Recovery Credit, employers use Form 941, the Employer’s QUARTERLY Federal Tax Return, for the applicable quarters in 2021. The form’s instructions provide specific worksheets to guide employers through the calculation.

The credit is applied against the employer’s share of Social Security taxes. If the credit amount exceeds the employer’s tax liability for the quarter, the excess is refundable and paid to the business.

For businesses that did not claim the credit on their original filings, a retroactive claim can be made. This is done by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, for each eligible quarter. The deadline for filing an amended return for 2021 is April 15, 2025.

Due to concerns about fraudulent claims, the IRS has placed a moratorium on processing new ERC claims. While the filing deadline for 2021 periods remains, there is legislative risk. A proposed federal tax bill would make any claims filed after January 31, 2024, ineligible for the credit.