Hi, I've got a question about who can qualify as a "recovery startup business" to claim the Employee Retention Credit.
A recovery startup business is a business that is smaller than $1M in annual gross receipts and "which began carrying on any trade or business after February 15, 2020." They're eligible for the Employee Retention Credit for July-December 2021, although they're limited to $50,000 of credit per quarter.
My question is, what counts as beginning to carry on a business after 2/15/2020?
Scenario 1: Sole proprietorship has been operating since 2019, but they incorporate the business on 7/1/2021 by forming a new corporation. It's the same operation for all practical purposes, but legally it's a brand new entity that started after 2/15/2020. Is this a recovery startup business?
Scenario 2: LLC disregarded entity (Schedule C) has been operating since 2019, but the LLC made an election to the taxed as an S corporation, effective in 2021. I'm thinking that this is not a recovery startup business, because LLC's are not disregarded for payroll tax purposes, and the ERC is a credit against payroll taxes.
Scenario 3: Corporation has been operating with employees since 2019. In 2021, the corporation forms a new LLC disregarded entity, which starts an employee leasing business. The LLC hires employees that worked for the corporation, and then leases those employees back to the corporation. There was no employee leasing business prior to 2/15/2020, so this would be a recovery startup business, right?
This just seems like a tremendous opportunity -- but I wanted to make sure it wasn't just a tremendous opportunity for abuse.
Do I need to tell all my sole proprietorships to form a corporation? (Some sole proprietorships have no employees, but the owner would be an employee if they incorporate.)
Do I need to tell all my business clients to start a new employee leasing business that leases only to their existing business?
It seems like an easy way for existing businesses to reduce payroll taxes by $100k by jumping through a few hoops. I'm not a fan of government handouts, but I do like to reduce taxes paid in using any legal method.