November 3, 2022

Unique ERC Opportunity: Did You Acquire a Struggling Business in 2020 or 2021?

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The Employee Retention Credit (ERC) program continues to award eligible employers who retained employees during the pandemic with significant refundable tax credits—up to $26,000 per employee. Eligible employers include those who can demonstrate either: (1) a full or partial suspension of business operations due to COVID-related governmental orders, or (2) a significant decline in gross receipts from 2019.1 In the context of the gross receipts test, any acquisition during 2020 or 2021 impacts that analysis. In this article, we want to emphasize to our readers that certain employers involved in an acquisition during 2020 or 2021 may have an opportunity to maximize their ERC by opting to aggregate pre-acquisition gross receipts.

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The IRS has clarified that to be an ERC-eligible employer “on the basis of a significant decline of gross receipts, the employer must take into account the gross receipts of all members of the aggregated group.”2 Generally, if an employer acquired a business in 2020 or 2021, the employer must aggregate gross receipts starting from the point the new business was acquired. However, the IRS provides employers with the option to choose to aggregate the acquired business’s gross receipts (to the extent information is available) from a time preceding the acquisition. According to the IRS, “under this safe harbor approach, the employer may include these gross receipts regardless of the fact that the employer did not own the acquired business during that 2019 calendar quarter.”3 The ERC opportunity created when the employer opts to aggregate pre-acquisition gross receipts may be illustrated as follows:

Example: In years 2019, 2020 and 2021, Employer owns a restaurant, Original Kitchen, that generated revenue in the amount of $1,000,000 per quarter. On July 1, 2020, Employer acquired another restaurant, New Recipe, which had been all but devastated by the effects of the pandemic. Although New Recipe was very profitable in 2019—generating $2,000,000 a quarter—its gross receipts dropped precipitously to $200,000 per quarter midway thru 2020. 
Employer’s aggregated quarterly gross receipts after acquiring New Recipe equal $1,200,000. Opting to include the pre-acquisition gross receipts, Employer includes $3,000,000 total (Original Kitchen’s 2019 quarterly amount of $1,000,000 plus New Recipe’s 2019 quarterly amount of $2,000,000) and determines a 60% decline when comparing $1,200,000 to $3,000,000. 
With a 60% decline—New Recipe qualifies Employer for ERC for the last two quarters of 2020 and the first three quarters of 2021.4

Conclusion

ERC analyses are complex—presenting numerous factors and circumstances that must be understood and incorporated into a comprehensive plan so that credit value is maximized, and audit risk is minimized. Employers involved in an acquisition during 2020 or 2021 have additional ERC considerations and tax planning opportunities. Any acquisitions could significantly impact the eligibility and gross receipts analyses. We urge any business involved in a 2020 or 2021 acquisition to consult with an experienced professional who can carefully assess ERC eligibility and ensure you don’t miss an opportunity to maximize the credit by opting to aggregate pre-acquisition gross receipts.

Footnotes

  1. A “significant decline” is demonstrated by an employer if gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).
  2. FAQ #43 at: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employer-is-considered-to-have-a-significant-decline-in-gross-receipts-and-maximum-amount-of-an-eligible-employers-employee-retention.
  3. Notice 2021-20, Q&A 28 and IRS FAQ #45 at: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employer-is-considered-to-have-a-significant-decline-in-gross-receipts-and-maximum-amount-of-an-eligible-employers-employee-retention.
  4. Note that an employer that acquires a trade or business in the middle of a 2020 calendar quarter and then opts to use the safe harbor approach must estimate the gross receipts it would have had from that acquired business for the entire quarter based on the gross receipts for the portion of the quarter that it owned and operated the acquired business. However, an employer that chooses not to use this safe harbor approach is only required to include the gross receipts from the acquired business for the portion of the quarter that it owned and operated the acquired business. Notice 2021-20.
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