As businesses srecover from the effects of the COVID-19 pandemic, many are exploring various tax credits to aid in their recovery. The Employee Retention Credit (ERC) offers significant tax relief for companies impacted by the pandemic.
However, there are aggregation rules in place that can impact which businesses are eligible for the ERC. In this blog post, we will dive into the basics of employee retention credit aggregation rules to help businesses navigate the complexities and take advantage of all available tax credits.
Affiliation and Aggregation Rules For Employee Retention Credit
The Employee Retention Credit (ERC) has aggregation rules based on existing Internal Revenue Code (IRC) laws. These rules group certain employees and businesses, including employees of the same corporate control group, workers of a common control trade or enterprise, and members of a connected service group.
The CARES Act treats these groups as single employers to claim the ERC. Understanding these rules is crucial for businesses looking to claim the credit, as misinterpretation or misapplication of the rules can result in penalties or disqualification from the credit. Moreover, the affiliation and aggregation rules for the PPP and ERC differ and depend on control authority and control exercise, respectively. Understanding the regulations for each incentive is crucial to ensure compliance and avoid any potential penalties or legal issues.
Employee Retention Credit Common Ownership
Corporations are aggregated for ERC purposes when five or fewer people own at least 80% of each firm in the company with at least 50% voting power. For businesses with multiple locations or units, such as a franchisee with multiple restaurants, the total number of employees and gross earnings must be combined to calculate the ERC based on a year-over-year reduction. SpiderERC has worked with numerous affiliated organizations: in some cases, there is a benefit, since if one affiliated company experiences a partial shutdown due to government orders, the other may qualify as well. However, in many cases, there is a reduction in benefits because credit is capped across the affiliated organizations.
In addition, aggregations rules affect whether a business is too large to qualify for the ERC. To qualify for the ERC, a business must have 100 or fewer employees between its enterprises. If the average number of employees is between 101-500, the business may still qualify, but only for salaries given to personnel who did not perform services. Further information on calculating the average number of employees can be found on page 11 of IRS Notice 21-20.
It is important to note that these rules and guidelines are subject to change and may be updated as necessary. Businesses should consult with a tax professional or legal advisor to ensure they comply with the latest regulations when determining their eligibility for the ERC.
Businesses with multiple units or entities may still qualify for the ERC. Still, they must carefully follow the affiliation rules to determine eligibility and calculate the credit based on year-over-year reduction. That’s why Spider ERC is here to help.