*The aggregated group rules affect all aspects of the ERC and may help, or hinder, an employer when determining eligibility and the amount of the credit.*
Q-1. Do aggregation rules apply for the ERC?
Q-2. What is the purpose of aggregation rules?
A-2. Aggregation rules may require certain taxpayers to aggregate as a parent-subsidiary controlled group, a brother-sister controlled group, or a combined group under common control.
Q-3. Why do aggregation rules matter for ERC purposes?
A-3. All entities that are aggregated and treated as a single employer under IRC §52(a), §52(b), §414(m), or §414(o) must be treated as a single employer for ERC purposes.
Q-4. How are the aggregation rules applicable in the ERC context?
A-4. The aggregation rules are applicable in the ERC context for determining:
Q-5. Which rules apply to aggregate corporate taxpayers in the context of controlled groups?
A-5. IRC §52(a), in conjunction with IRC §1563, are applicable to controlled groups of corporations. Under these rules, corporate taxpayers may be required to aggregate as a parent-subsidiary controlled group, a brother-sister controlled group, or a combined group of corporations.
Q-6. What is a “common parent”?
A-6. A “common parent” is the corporation owning 80% or more of the voting power or value of at least one other corporate group member. IRC §52(a)(1) modifies this definition, reducing the percentage rate to “more than 50%.”
Q-7. What is a “parent-subsidiary controlled group”?
A-7. A “parent-subsidiary controlled group” is one or more chains of corporations which are connected through stock ownership with a common parent corporation if group members, in the aggregate:
Q-8. What is a “brother-sister controlled group”?
A-8. Two or more corporations are deemed a “brother-sister controlled group” if five or fewer individuals, estates, or trusts own (directly or constructively):
Q-9. What happens if a corporation is a component member of two or more brother-sister controlled groups?
A-9. A corporation may be treated as a component member of only one controlled group for any taxable year. The corporation may choose the group in which it will be a component member by including on or with its return a statement titled “STATEMENT TO ELECT CONTROLLED GROUP PURSUANT TO §1.1563-1(c)(2).”
If no election is filed, the IRS will determine the group in which the component corporation is to be included.
Q-10. What constitutes a “combined group of corporations”?
A-10. A combined group of corporations is three or more corporations each of which is a member of either a parent-subsidiary controlled group or a brother-sister controlled group, and one or more of the corporations is both:
Q-11. What if a trade or business is not incorporated?
A-11. IRS §52(b) aggregation rules apply to entities which are not incorporated (i.e., partnerships, trusts, estates, sole proprietorships). Such entities will also be treated as a single employer if they are under “common control.” Applying rules analogous to the IRS §52(a) rules described above, the entities will be treated as under “common control” if they are determined to be members of a parent-subsidiary group, a brother-sister group, or a combined group.
Q-12. How is the ERC allocated in the context of an aggregated group?
A-12. The ERC must be apportioned among the members of the aggregated group based on their proportionate share of the qualified wages for the entire controlled group.
Q-13. In the context of an aggregated group, if the operations of a trade or business of one member are suspended by a governmental order, are the other group members’ operations of that trade or business considered to be fully or partially suspended for purposes of the ERC?
A-13. Yes. If a trade or business is operated by multiple members of an aggregated group and if one member’s operations of that trade or business are suspended by a governmental order, then all members of the aggregated group are considered to have their operations of that trade or business partially suspended, even if any other member(s) are not subject to a governmental order.
Q-14. What if the natures of the businesses in a controlled group are unrelated?
A-14. If the controlled group rules are met for any business, whether or not the natures of the businesses are similar or not (i.e. manufacturing and restaurant), the businesses must be aggregated and treated as a single employer.
Q-15. How is a “significant reduction in gross receipts” calculated to determine if a 50% decline for 2020, or a 20% decline for 2021, occurred?
A-15. This calculation is based on the entire Aggregated Group. It does not matter if one member would be independently eligible based on their 2020 numbers, while two other members would be ineligible based on their own numbers. In an aggregated group context, the determination is only able to be made after adding all of the members’ gross receipts together.
Q-16. If an employee is employed by two or more aggregated group members, what is the maximum amount of qualified wages for all calendar quarters that may be taken into account for that employee?
A-16. $10,000 (either per year in 2020 or per quarter in 2021). An aggregated group (treated as a single employer) may not claim more than the maximum credit of $5,000 with respect to any one employee who is employed by the aggregated group members.
Whether or not Congress replenishes other forms of pandemic related relief for businesses, the ERC remains available now. Numerous government orders restricted a broad range of ordinary business operations in the industry—and you may be one of many employers entitled to substantial cash benefits. If you operate a business, don’t wait to find out if you qualify! Contact our team today at (410) 497-5947 or schedule a consultation.