Demystifying Employee Retention Credit Aggregation Rules: How to Optimize Savings for Your Company

Demystifying Employee Retention Credit Aggregation Rules: How to Optimize Savings for Your Company

employee retention credit (ERC) has been a vital lifeline for many businesses during the COVID-19 pandemic. This tax credit was introduced as part of the CARES Act in March 2020 and has since been expanded and extended to provide financial relief to employers who have retained their employees during these challenging times.

One important aspect of the ERC that has caused confusion among many businesses is the aggregation rules. These rules dictate how the ERC is calculated for businesses that are part of a larger group of companies. Understanding and optimizing these aggregation rules can lead to significant savings for your company.

What are Aggregation Rules?

Aggregation rules are guidelines set by the IRS to determine how the ERC is calculated for businesses that are considered part of a larger group. In simple terms, if a business is part of a controlled group, a group of businesses that are under the same common control, the ERC is calculated based on the combined wages and qualified health plan expenses of all the entities within the controlled group.

For example, if Company A and Company B are both part of a controlled group, the ERC will be calculated based on the combined wages and qualified health plan expenses of both companies, rather than separately for each company.

How to Optimize Savings

While the aggregation rules may seem complex, there are strategies that businesses can implement to optimize savings and maximize the ERC. Here are some tips to help your company make the most of the ERC aggregation rules:

1. Understand Your Controlled Group: The first step in optimizing the ERC is to understand whether your business is part of a controlled group. If you have multiple entities under common control, it’s important to identify all the businesses within the group and determine how the ERC will be calculated for the entire group.

2. Maximize Wages and Qualified Health Plan Expenses: Since the ERC is calculated based on the combined wages and qualified health plan expenses of all entities within the controlled group, it’s important to maximize these expenses to take full advantage of the credit. Consider implementing strategies to increase wages and enhance employee benefits to maximize the ERC.

3. Coordinate with tax and Legal Advisors: Given the complexity of the ERC aggregation rules, it’s crucial to work closely with your tax and legal advisors to ensure compliance and optimization of the credit. They can provide valuable insights and guidance on how to structure your business and maximize the ERC within the bounds of the aggregation rules.

4. Leverage Retroactive Changes: The ERC has undergone retroactive changes and expansions, particularly with the passage of the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021. Businesses should review and take advantage of these changes to retroactively claim the ERC and optimize savings for previous periods.

5. Stay Informed: As the ERC continues to evolve, it’s essential to stay informed about any updates, changes, and clarifications related to the aggregation rules. By staying informed, your company can adapt and optimize the ERC to maximize savings and financial relief.

In conclusion, demystifying the employee retention credit aggregation rules is essential for businesses to optimize savings and take full advantage of this valuable tax credit. By understanding the rules, coordinating with tax and legal advisors, and staying informed about changes, businesses can strategically leverage the ERC to support their employees and navigate the economic challenges brought about by the pandemic.