Learn How to Claim the ERC When You Own Multiple EntitiesTax Planning
Do you qualify for the employee retention credit (ERC)? Did you claim it?
It’s not too late. You can still amend your 2020 and 2021 payroll tax returns.
Remember, this can be worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021 for a 2021 total of $21,000 ($26,000 per qualifying employee for 2020 and 2021 combined).
Example. Let’s say you have 10 employees who fully qualify for the credit. That’s a $260,000 tax credit (think cash): ($5,000 + $7,000 + $7,000 + $7,000) x 10 = $260,000.
This article focuses on the ERC when you have more than one entity. You will see some surprising rules. Let’s start with some basics.
Who Must Aggregate Businesses?
When you own more than one entity, you face special rules when it comes to the employee retention credit.
And you don’t have to own the other entity entirely to face the special rules.
Here are just a few examples of who has to aggregate businesses for purposes of the ERC:
- Howard operates his dental practice as an S corporation, and he also owns three rental properties that he deems businesses.
- Carla Corporation operates 11 subsidiary corporations located in seven states.
- Jack, Jake, and Jim own one-third of four corporations.
Okay, So What?
When you aggregate the business entities into one for the ERC, you have to consider the following questions:
- Are you now (because of the aggregation) a small or a large employer under the 100 (2020) or 500 (2021) large employer test?
- What does the aggregation of the businesses mean for your qualifying under the decline-in-gross receipts test?
- What is the effect of a government COVID-19 shutdown or modification order on one of the entities, and how does it affect the aggregated group?
- How do you treat employees who work for more than one of the entities?
Let’s start with the small and large employer classifications.
Small or Large Employer
Here’s how to determine qualifying wages for your business:
- For a small eligible employer (100 or fewer aggregated employees in 2020), ERC qualified wages are the wages paid with respect to an employee during any period in the calendar quarter in which (a) the business operations are fully or partially suspended due to a governmental order, or (b) the business is experiencing a significant decline in gross receipts.
- For a large eligible employer (more than 100 aggregated employees in 2020), ERC qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of the employer’s business operations due to a governmental order, or (2) a significant decline in the business’s gross receipts.
For the year 2021, replace “100” (employees) in the above bullets with “500” (employees).
Aggregation Effect on Decline in Gross Receipts
All entities that are treated as a single employer under the aggregation rules are treated as a single employer for purposes of determining whether the employer experienced a significant decline in gross receipts.
If the aggregated group does not experience a significant decline in gross receipts, then no member of the group may claim the employee retention credit on that basis.
Aggregation Effect with the Governmental Order
Being subject to a governmental order suspending business operations can produce a most favorable result for an employer group like the one described just above.
Question. If the operations of a trade or business of one member of an aggregated group are fully or partially suspended due to a governmental order, are the operations of the trade or business of the other members of the aggregated group considered to be fully or partially suspended for purposes of the ERC?
The IRS answer:
Yes. All members of an aggregated group that are treated as a single employer under the aggregation rules are treated as a single employer for purposes of the employee retention credit.
If a trade or business is operated by multiple members of an aggregated group, and if the operations of one member of the aggregated group are suspended due to a governmental order, then all members of the aggregated group are considered to have their operations partially suspended, even if another member of the group is in a jurisdiction that is not subject to a governmental order.
Example: Employer Group M is a restaurant chain that operates a single trade or business through multiple subsidiary corporations located in various jurisdictions. Employer Group M is treated as a single employer under the aggregation rules for purposes of the employee retention credit.
Certain members of Employer Group M’s operations are fully suspended due to a governmental order, while other members of Employer Group M’s operations are not subject to a governmental order and remain open.
Because Employer Group M is treated as a single employer for purposes of the employee retention credit, the operations of all members of Employer Group M are treated as fully or partially suspended due to governmental orders suspending the operations of certain Employer Group M members.
Note how the governmental order aggregation can create ERC benefits whereas the gross receipts aggregation is more problematic.
How Employees Impact the ERC for the Combined Group
When the group qualifies for the ERC, it allocates the ERC to members of the group based on the member’s qualified wages that created the ERC.
When one employee works for more than one member of the aggregated group, you allocate the credit based on qualified wages paid by each member.
Example. Lola works for Company A and Company B (both in the aggregated group), and each company pays Lola $10,000 for the second quarter of 2020, an ERC qualifying quarter for the group. Lola earned $20,000, but only $10,000 qualifies for the credit. A and B each use half of the $10,000 in qualifying wages for claiming their ERC.
ERC Rules for Aggregating
Here’s who has to aggregate, according to the IRS:
All entities that are members of a controlled group of corporations or trades or businesses under common control under sections 52(a) or (b) of the Code, members of an affiliated service group under section 414(m) of the Code, or otherwise aggregated under section 414(o) of the Code are treated as a single employer for purposes of applying the employee retention credit.
The controlled group of corporations under Section 52(a) may be a parent-subsidiary controlled group, a brother sister controlled group, or a combined group of corporations.
The Section 52(b) aggregation rules apply to partnerships, trusts, estates, corporations, or sole proprietorships in trades or businesses under common control.
Under this rule, entities are treated as a single employer if they are under common control applying rules similar to the parent-subsidiary or brother-sister controlled group rules or the rules for a combined group of corporations.
Sections 414(m); 414(o)
There are three types of affiliated service groups described in Section 414(m).
- The first and second types of affiliated service groups are described under Section 414(m)(2) and require a combination of common ownership and performance of services among certain organizations.
- The third type of affiliated service group is described under Section 414(m)(5). It requires no common ownership and aggregates employers based on the performance of management functions by one organization for another organization (and related organizations).
Section 414(o) instructs the IRS to create grouping rules that establish a single employer, to prevent discrimination among employees through the use of separate organizations, employee leasing, or other arrangements.
In most cases, identifying the group to aggregate is going to be straightforward, but it can get pretty complicated with some entities. The bottom line is that it’s likely worthwhile to aggregate and see what’s possible for the ERC.
Remember, the payoff per employee can equal $26,000 ($5,000 for 2020 and $21,000 for 2021). If you qualify for the ERC and have not yet filed, you will need to amend your IRS Forms 941 for the appropriate quarters.
When you aggregate, you look at gross receipts compared with 2019, and you also look to government shutdown orders. Obviously, you use either (a) the gross receipts drop or (b) the shutdown order. Choose the one that gives you the best benefits.
There’s a pleasant surprise with the government shutdown order because if that order affects one entity in the group, the IRS says it affects the entire group. For example, Sam owns five retail corporations. One was shut down by governmental order. That shutdown applies to all five corporations and can create tax credits with each of the five.