The employee retention credit (ERC) has been invaluable to many employers during the ongoing COVID-19 pandemic. It provides a significant incentive for businesses to retain employees by offering a tax credit against certain employment taxes. However, understanding and navigating the ERC can be complex, especially when it comes to the aggregation rules.
The aggregation rules, as outlined in the Consolidated Appropriations Act, 2021, impose limitations on the ERC based on the common ownership or control of businesses. This means that if multiple businesses have common ownership or are under common control, their ERCs may be aggregated or combined for purposes of calculating the credit.
So, why are these aggregation rules so important? Well, they can have significant implications for employers. Let’s explore some key considerations that employers should keep in mind when unraveling the ERC aggregation rules.
First and foremost, understanding the definition of common ownership is crucial. Common ownership exists when one person or a group of persons owns at least 50% of the total combined voting power of all classes of stock entitled to vote or at least 50% of the total value of shares of all classes of stock. This means that if two or more businesses share common owners, their ERCs will likely be aggregated.
Next, it is essential to determine whether the aggregation rules apply based on common control. Common control exists when one person or group of persons possesses the power to direct or cause the direction of the management or policies of the businesses through ownership or other means. This can occur when there is a parent-subsidiary relationship, a brother-sister relationship, or when an individual or entity has effective control over the businesses.
Businesses under common control must aggregate their ERCs, regardless of whether they have common ownership. This means that even if two or more businesses don’t share common owners, their ERCs may still be combined if they are under common control.
Another key consideration is the maximum credit amount under the aggregation rules. The maximum ERC that can be claimed for wages paid to any individual employee is $10,000. However, when businesses are aggregated, this maximum amount applies to the combined wages paid by all aggregated businesses.
For example, if a business paid $8,000 in qualified wages to an employee and it is under common control with another business that also paid $8,000 in qualified wages to the same employee, only a maximum of $10,000 can be claimed as the ERC for that employee.
Additionally, businesses must also consider the aggregation rules when it comes to the gross receipts test. Under the ERC rules, businesses with a significant decline in gross receipts are eligible for the credit. In determining whether the decline in gross receipts meets the threshold, businesses that are aggregated must combine their gross receipts.
So, if two businesses under common control have a significant decline in gross receipts when aggregated but separately they don’t meet the threshold, they may still be eligible for the ERC.
Lastly, employers should be aware of the potential penalties for non-compliance with the aggregation rules. If businesses fail to properly aggregate their wages or gross receipts, they may face penalties for underpaying taxes, providing incorrect information to the IRS, or claiming credits they are not entitled to. Therefore, understanding and adhering to the aggregation rules is essential to avoid any penalties or repercussions.
In conclusion, the ERC aggregation rules play a critical role in determining the eligibility and extent of the credit for employers. Employers must carefully assess their ownership and control structures, consider the impact on the maximum credit amounts, and account for aggregated gross receipts. Failure to do so may result in missed opportunities or potential penalties. Seeking professional advice and expertise can be instrumental in ensuring compliance with the ERC aggregation rules and optimizing the benefits for employers during these challenging times.