April 14, 2022

ERC Aggregation Rules: Good News for Owners of Multiple Businesses?

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The Employee Retention Credit program (ERC) was enacted to award those employers who retained employees during the pandemic with a significant refundable tax credit—up to $26,000 per employee. Remarkably, ERC credits often exceed the initial payroll tax liabilities themselves. The ERC has already awarded millions of dollars to a broad spectrum of employers, including businesses deemed to belong in “controlled groups.”  Whether the business operations are related to each other or not, if the applicable rules aggregate the entities such that they are treated as a single employer, then if one of the entities qualify—all of the entities qualify! So, whether you own a restaurant, a construction company, and a travel agency, or you operate as a multi-unit franchisee who owns several restaurants —Frost Law can help owners of multiple businesses maximize this well-deserved cash benefit.

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ERC Controlled Group Rules

Remember, the basic definition of “eligible employer” is one who experiences either: (1) fully or partially suspended business operations for any 2020 or 2021 calendar as a result of  governmental orders limiting commerce, travel, or group meetings due to COVID-19, or (2) a significant decline in gross receipts during a calendar quarter in 2020 or 2021.

Moreover, an ERC-eligible employer is determined on a controlled group basis. Specifically, the IRS states: “An Eligible Employer, for purposes of the Employee Retention Credit, includes all members of an aggregated group that are treated as a single employer in accordance with the provisions of section 2301(d) of the CARES Act.”¹ [Emphasis added]. In other words, if multiple businesses are controlled by common ownership, then all of the entities in the group are deemed a single employer and aggregated for all ERC purposes, including: 

(a) whether a trade or business has been fully or partially suspended, 
(b) whether the employer has a significant decline in gross receipts,
(c) the number of average employees, and 
(d) the calculation of qualified wages.

There are three categories of aggregated companies that may be classified as controlled groups:

  • First, the IRS has clarified that a parent-subsidiary controlled group of corporations is generally described “as one or more chains of corporations where the common parent corporation owns more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or more than 50 percent of the value of all classes of stock of each corporation.”² In other words, a single entity owns 50% or more of all of the entities.
  • Next, according to the IRS, “[a] brother-sister controlled group of corporations, generally, is two or more corporations where: (1) five or fewer persons who are individuals, estates, or trusts own at least 80 percent of the total combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of each corporation; and (2) the same five or fewer persons, taking into account ownership only to the extent that it is identical with respect to each corporation, own more than 50 percent of the total voting power of all classes of stock entitled to vote, or total value of shares of all classes of stock of each corporation.”³ [Emphasis added]. More simply, it is generally the case that a brother-sister relationship exists when 5 or fewer persons own 80% (or more) of each entity in the group with at least 50% voting power.
  • Finally, the IRS provides that “[a] combined group of corporations is three or more corporations, each of which is a member of either a parent-subsidiary or a brother-sister controlled group, and at least one of which is both the common parent of a parent-subsidiary controlled group and also a member of a brother-sister controlled group.”⁴ [Emphasis added.] Basically, combinations of parent-subsidiary and brother-sister groups will be classified as controlled groups.

The interplay of these rules may best be understood in examples considered below.

ERC Controlled Group Examples

Ex. 1. Partial Suspension

Assume Bob is the sole owner of five businesses: four restaurants and Bob’s Consulting Company. Two restaurants are located in State A, and 2 restaurants are located in State B. Bob’s Consulting Company is also located in State B. Bob can demonstrate a partial suspension of operations at the State A restaurant locations, because the restaurants in State A were subject to governmental indoor dining bans. However, no similar bans applied to the State B restaurant locations. And Bob’s Consulting Company experienced neither a decline in gross receipts (indeed, its revenue increased throughout the pandemic), nor was it subject to any pandemic-related governmental order. 

Since Bob is the sole owner of all of the businesses, this is a brother-sister controlled group (i.e., 5 or fewer persons own 80% of the businesses and have 50% voting power over all of the businesses). The ERC aggregation rules apply. All five companies will be deemed a single employer, and even though only two of the businesses were actually subject to indoor dining restrictions, all of the businesses will be ERC eligible due to the partial suspensions resulting from the governmental orders impacting the two State A restaurants.

Ex. 2. Gross Receipts

Bob owns a construction company, Build It, and two restaurants, Main Course and Mystery Meat. In 2020, Build It had gross receipts of $450,000 in Q2, which were 45% of those in Q2 of 2019 ($1,000,000). On the other hand, Main Course’s Q2 gross receipts were $8,000—80% of those in Q2 of 2019 ($10,000), and Mystery Meat’s Q2 gross receipts were $7,000—70% of those in Q2 of 2019 ($10,000). Since Bob is the sole owner of all of the restaurants, this is a brother-sister controlled group (i.e., 5 or fewer persons own 80% of the businesses and have 50% voting power over all of the businesses). All three businesses will be treated as one employer. Thus, the total 2019 Q2 gross receipts were $1,020,000. The total 2020 Q2 gross receipts were $465,000. This means that there was a total decline in gross receipts of about 54%--so all three companies are ERC eligible. Significantly, without the aggregation rules, neither Main Course, nor Mystery Meat would’ve qualified, because their gross receipts declines did not reach the 50% threshold. *Note that in 2021, employers only need to show a 20% decrease. * 

Ex. 3. Number of Average Employees and Calculation of Qualified Wages

Almost the same facts as Ex. 2 above, except that Bob’s solely owned MC Corporation in turn solely owns all of Build It, Main Course, and Mystery Meat, and (2) the Q2s used for comparison are 2019 and 2021. Rather than a brother-sister controlled group relationship, this has become both a parent-subsidiary controlled group relationship and a brother-sister controlled group relationship (so, aggregation still applies). With an even lower 20% gross receipts decrease threshold for 2021, we can quickly determine that the 54% decrease satisfies this. 

Assume further that Build It has five employees and the restaurants each have 20 employees. Since ownership is controlled, the businesses are deemed a single employer and the number of average employees will also be aggregated—meaning this is a small employer and all 45 employees will qualify for the per employee cap at a $7,000 tax credit per year in 2021. *Note that if an employee works for all multiple companies here within the group, there is no double dipping to get a $7k credit for the same employee in two different entities. * 

Conclusion

The ERC remains available now—even for controlled groups. So if you own multiple businesses, whether the business operations are related to each other or not, if the applicable rules aggregate the entities such that they are treated as a single employer, then all of your businesses may qualify! The time to start analyzing ERC eligibility for owners of multiple businesses is now—and we can help you maximize the benefits that may be available to you. Contact our team at (410) 497-5947 or schedule your free evaluation with our team HERE.

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