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Case Study: Employee Retention Credit for Start-Up Business


Here’s a client story that I believe you will find of interest.


Henry and Heide own an S corporation 50-50. For more than five years, the corporation has operated a successful $10 million-a-year restaurant.

Henry, Heide, and Harry formed a new S corporation that started a new restaurant in June 2021. The ownership is 35 percent for Henry, 35 percent for Heide, and 30 percent for Harry.

During the four months of June through September of 2021, the new restaurant had gross receipts of $300,000. During the quarter ending December 31, 2021, the restaurant had gross receipts of $800,000. So for it’s seven months of operation it has $1.1 million in gross receipts.


Will the new S corporation’s restaurant qualify for the start-up employee retention credit (ERC) of up to $50,000 for the fourth quarter?


Yes. Here’s why.

The new restaurant is a new business that started after February 15, 2020, with a new set of owners and its own set of books. It clearly qualifies as a new business—the first step to qualifying as a recovery start-up business.

The second step is for average annual gross receipts to not exceed $1 million—using tax law’s calculation which in this case excludes the fourth quarter.

The tax code calculated average annual gross receipts for 2021 that precede the calendar quarter for which the restaurant determines the credit are $900,000 and therefore do not exceed $1,000,000. Here’s how you make the calculation: $300,000 x 12 ÷ 4 = $900,000. Also, note that you apply the gross receipts test to the four-month period of existence because that’s how long the new restaurant had been in existence before the last quarter of 2021.

You don’t have to aggregate the new restaurant with the existing restaurant because the two S corporations fail the single employer test.

Under the single employer test, corporate taxpayers that are members of a controlled group of corporations are treated as a single employer. A brother-sister controlled group of corporations is two or more corporations where

  1. five or fewer persons who are individuals, estates, or trusts own at least 80 percent of the total voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of each corporation; and
  2. the same five or fewer persons, taking into account ownership only to the extent that it is identical with respect to each corporation, own more than 50 percent of the total voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of each corporation.

Because Henry and Heide each have 35 percent ownership in the new corporation and they have 50 percent each in the existing corporation, the corporations are not a controlled group.

Key point. Had Henry and Heide formed the new corporation 50-50 (no third-party Harry), they would have had to aggregate the two corporations. The aggregation would make them exceed the $1 million in gross receipts and would have denied them any ERC for a recovery start-up business.

A Sad Deal

The requirement to aggregate along with the $1 million in receipts limit means that few new businesses will qualify for the recovery start-up business ERC.

From a compliance and clarity standpoint, it’s sad that the IRS in Notice 2021-49 did not address the aggregation rule other than with a mention in an afterthought manner on page 11. We all would have liked an example or two.

If you would like to discuss the ERC, please contact me.

If you have any questions about whether or not this applies to you please email Morey at

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