Cassidy Jakovickas.

Though it can be a lucrative opportunity, the ERC tax credit has many gray areas that require a reasonable interpretation of available guidance from official sources. The ERC rules for aggregated entities are one such example. In this article, I’ll explain how the ERC tax credit works for aggregated entities, also known as controlled groups.

What is an aggregated entity?

When a business has multiple entities within it but is considered one business, it is known as a controlled group or aggregated entity. There are three kinds of controlled groups: parent subsidiaries, brother-sister subsidiaries, and combined groups. In a parent subsidiary, one entity owns 50% or more of its entities. In a brother-sister subsidiary, 5 or fewer people own at least 80% of each entity with at least 50% voting power. A combined group is a blend of brother-sister and parent subsidiaries.

What are the ERC aggregation rules for controlled groups?

• — All entities within a controlled group must calculate their ERC as a single entity (IRC Section 3134).
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• — Thresholds for qualified wages are based on the combined total of employees across all aggregated companies.
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• — Eligible aggregated entities must divide their ERC amount between all entities according to each entity’s share of qualified wages.
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How can aggregated entities qualify for the ERC tax credit?

Many advertisements about the ERC offer only vague details about how eligibility is determined. Here are the two tests that you can use to decide whether you’re eligible to receive the ERC tax credit.

The revenue decline test

The first and most straightforward way to qualify for the ERC tax credit is to have a decline in revenue in 2020 and 2021. Between March 13, 2020 and December 31, 2020, you may qualify for the ERC tax credit if your gross receipts for any quarter decreased by at least 50% when compared to the corresponding quarter in 2019. Between January 1, 2021 and September 30, 2021, you may qualify for the ERC if your revenue dropped by at least 20% when compared to the corresponding 2019 quarter.

The suspended operations test

If you didn’t experience a qualifying revenue decline in 2020 or 2021, you may still qualify for the ERC tax credit under the suspension test. Under this criteria, you may qualify for the ERC tax credit if you experienced a complete or partial shutdown in 2020 or 2021 due to a COVID-19 government mandate. Because the ERC suspension test is highly misunderstood, it’s worth clarifying a few details:

The Center For Disease Control’s (CDC)  guidelines are not valid justifications for claiming the ERC: Question 20 in IRS Notice 2021-20 distinguishes between two employers who suspended operations because of COVID-19. One employer is described as merely “following CDC or DHS” guidelines while the second is described as qualifying because of a mandated suspension. This suggests that CDC guidelines cannot be used to justify ERC eligibility unless a local government order specifically required you to follow them.

OSHA advisory notices are insufficient for ERC eligibility: While some point to OSHA recommendations for their ERC eligibility, the COVID-19 page on the OSHA website explicitly describes OSHA guidelines as “advisory.” The ERC tax credit requires a government mandate, which excludes “advisory” OSHA guidelines.

OSHA’s “General Duty Clause” cannot be used to validate ERC eligibility: Many business owners point to the OSHA workplace safety requirements under the “General Duty Clause.” But this was created in the 1970s and is not a COVID-19-related mandate, as required by Internal Revenue Code Section 3134.

Supplier shutdowns must be referenced with caution and due diligence: The answer to Question 12 in IRS Notice 2021-20 states that a company is only considered eligible if it cannot continue operations because it lacks critical materials from a COVID-19-impacted supplier with a qualifying shutdown. Since eligibility in this scenario is based on an inability to obtain materials, it’d be best to document your efforts to find alternative suppliers before relying on this clause as your ERC eligibility basis.

Calculating qualified wage amounts under ERC aggregation rules

After confirming your ERC eligibility through either the revenue test or suspension test, you can start calculating your ERC amount by determining your qualified wages. For aggregated entities, qualified wages should be calculated based on the total employee headcount of all entities within the controlled group. Here are the guidelines for calculating your qualified wages for the ERC:

• — 2020 (100 or fewer employees): You may claim up to 50% of wages paid to working and non-working staff during eligible quarters.
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• — 2020 (over 100 employees): You can get up to 70% of wages paid to staff who were employed but did not work during eligible quarters.
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• — 2021 (500 or fewer employees): You can receive up to 70% of wages paid to working and non-working staff during eligible quarters.
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• — 2021 (over 500 employees): You can get up to 70% of wages paid to non-working staff during eligible quarters.
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For 2020, the maximum amount of qualified wages is $10,000 per employee. However, in 2021, the qualified wages cap increased to $10,000 per employee per eligible quarter.

Can aggregated entities claim the Employee Retention Credit?

Being part of an aggregated entity or controlled group does not make you ineligible for the ERC tax credit. However, because special considerations apply to controlled groups, you must perform due diligence to ensure you can substantiate your eligibility for the ERC. That way, when the IRS audits your ERC claim, you’ll be able to pass with confidence.

If you’d like to learn more about the Employee Retention Credit, here are some of my other articles:

• A $2 Trillion Lesson? How ERC Fraudsters Get The Best Of You
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• Are you overlooking the Employee Retention Tax Credit opportunity? – The Business Journal
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• An ERTC guide for recovery startup businesses
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• My business was suspended. Do I qualify for the ERTC?

 

Cassidy Jakovickas, CPA, is president and CEO of MBS Accountancy Corp. in Downtown Fresno.