ERC Controlled Group Rules | Attribution Rules for Employee Retention Credit | Affiliation Rules for Employee Retention Credit

ERC Controlled Group Rules | Attribution Rules for Employee Retention Credit | Affiliation Rules for Employee Retention Credit

An ERC-eligible employer is determined on a controlled group basis. Specifically, the IRS states: "An Eligible Employer, for purposes of the Employee Retention Credit, includes all members of an aggregated group that are treated as a single employer in accordance with the provisions of section 2301(d) of the CARES Act." In other words, if multiple businesses are controlled by common ownership, then all of the entities in the group are deemed a single employer and aggregated for some ERC purposes, including:

(a) whether the employer has a significant decline in gross receipts,

(b) the number of average employees, and

There are three categories of aggregated companies that may be classified as controlled groups:

First, the IRS has clarified that a parent-subsidiary controlled group of corporations is generally described "as one or more chains of corporations where the common parent corporation owns more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or more than 50 percent of the value of all classes of stock of each corporation." 2 In other words, a single entity owns 50% or more of all of the entities.
Next, according to the IRS, "[a] brother-sister controlled group of corporations, generally, 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 combined 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." 3 More simply, it is generally the case that a brother-sister relationship exists when 5 or fewer persons own 80% (or more) of each entity in the group with at least 50% voting power.
Finally, the IRS provides that "[a] combined group of corporations is three or more corporations, each of which is a member of either a parent-subsidiary or a brother-sister controlled group, and at least one of which is both the common parent of a parent-subsidiary controlled group and also a member of a brother-sister controlled group." 4 Basically, combinations of parent-subsidiary and brother-sister groups will be classified as controlled groups.

The interplay of these rules may best be understood in the controlled group examples considered below.

ERC Controlled Group Examples

Ex. 1. Partial Suspension

Assume Steve owns three businesses: two restaurants and Stunning Steves's Condo Construction Company. Steve can demonstrate a partial suspension of operations at both restaurant locations, because the restaurants were subject to pandemic-related governmental indoor dining bans. However, no similar partial suspension due to governmental orders was applied to Steve's Condo Construction Company (which remained an "essential business" during the pandemic). Additionally, Steve's Condo Construction Company did not experience a decline in gross receipts (indeed, its revenue increased throughout the pandemic).

Since Steve is the sole owner of all three businesses, this is a brother-sister controlled group (i.e., 5 or fewer persons own 80% of the businesses and have 50% voting power over all of the businesses). The ERC aggregation rules apply. All three companies will be deemed a single employer when determining whether the group qualifies based on significant decline in gross receipts. Here the gross receipts did not go down over the entire group, and so only two of the businesses that were actually subject to indoor dining restrictions, due to the partial suspensions resulting from the governmental orders impacting the restaurants.

Ex. 2. Gross Receipts

Steve owns a construction company, Build It and They Will Come, and two restaurants, Eat Ums and The Potato Bar. In 2020, Build It and They will Come had gross receipts of $395,000 in Q2, which were 49.4% of those in Q2 of 2019 ($800,000). On the other hand, Eat Ums's Q2 gross receipts were $9,500—86.3% of those in Q2 of 2019 ($11,000), and The Potato Bar's Q2 gross receipts were $8,200—68.3% of those in Q2 of 2019 ($12,000). Since Steve is the sole owner of all of the restaurants, this is a brother-sister controlled group (i.e., 5 or fewer persons own 80% of the businesses and have 50% voting power over all of the businesses). All three businesses will be treated as one employer. Thus, the total 2019 Q2 gross receipts were $823,000. The total 2020 Q2 gross receipts were $412,700. This means that there was a total decline in gross receipts of about 50.1%--so all three companies are ERC eligible due to revenue reduction. Without the aggregation rules, Build It and They Will Come did not qualify, while the two restaurants qualified individually.

*Note that in 2021, employers only need to show a 20% decrease.

Ex. 3. Number of Average Employees and Calculation of Qualified Wages

Almost the same facts as Ex. 2 above, except that Steve's solely owned MC Corporation in turn solely owns all of Build It and They will Come, Eat Ums, and The Potato Bar, and (2) the Q2s used for comparison are 2019 and 2021. Rather than a brother-sister controlled group relationship, this has become both a parent-subsidiary controlled group relationship and a brother-sister controlled group relationship (so, aggregation still applies). With an even lower 20% gross receipts decrease threshold for 2021, we can quickly determine that the 50.1% decrease satisfies this.

Assume further that Build It and They will Come has five employees and the restaurants each have 20 employees. Since ownership is controlled, the businesses are deemed a single employer and the number of average employees will also be aggregated—meaning this is a small employer and all 45 employees will qualify for the per employee cap at a $7,000 tax credit per year in 2021.

Note: If Build It and They Will Come in 2019 had 451 employees and the restaurant had 20 employees each. The total aggregated employee count in 2019 would be 501; therefore, the group would be considered a Large Employer. As a Large Employer, only the employees being paid to NOT PROVIDE services are eligible for the calculation of qualifying wages.

*Note that if an employee works for all multiple companies here within the group, there is no double dipping to get a $7k credit for the same employee in two different entities.

Conclusion

The ERC remains available now—even for controlled groups. So if you own multiple businesses, whether the business operations are related to each other or not, if the applicable rules aggregate the entities such that they are treated as a single employer, then all of your businesses may qualify! The time to start analyzing ERC eligibility for owners of multiple businesses is now—and we can help you maximize the benefits that may be available to you. Contact our team today at (855) 829-5877 or schedule a confidential consultation.

Deadline for 2020: April 15, 2024