In my last blog, I broke down the IRS FAQs about how a business can qualify for the Employee Retention Credit due to a partial government shutdown. But, there is another layer of rules to consider if you own multiple businesses – the Aggregation Rules.
The big question is what ownership structures does the IRS consider to be the same business? If it is the same business, then it is considered to be a “controlled group.” There are two primary types of controlled groups: parent-subsidiary - where one entity owns 50% or more of all entities and brother-sister - where 5 or fewer people own at least 80% of each entity in the group with at least 50% voting power. (Technically, there is a third group – a “combined group” which is a combination of brother-sister and parent-subsidiary companies.)
Many restaurants are owned by multi-unit owners. In the example of a multi-unit franchisee who owns 3 restaurants, all of the restaurants would have to be added together to determine the total number of employees and the total receipts of the business for the purpose of calculating the ERC based on year over year decline. The reason this is so important is because it is at this aggregated level that you determine whether the business is too big to qualify for the ERC.
The magic number that you need to be under is 100 or fewer employees between all of your businesses. (Technically, you still qualify if you have an average of 101-500, but only for wages paid to employees who did not provide any services. So, not super helpful.) See page 11 of IRS Notice 21-20 for details on calculating the average number of employees.
One interesting sidebar: It doesn’t matter if the types of businesses that you own are related to one another. So long as the controlled group rules are met for any business, you have to aggregate the businesses. This is true if, for example, you own a restaurant, a manufacturing company, and a janitorial services company. If the ownership is controlled, they all get added together for the purposes of the ERC.
Ok, so let’s say you made it under the 100 employee threshold, even after you added all of your average employee numbers up among all of your companies. So long as you otherwise qualify for the ERC due to either a partial or complete shutdown order or year over year sales decline versus the same quarter in 2019 (50% in 2020 and 20% in 2021), you will have to follow these additional rules:
1. You have a per employee cap at a $5,000 tax credit per year in 2020 and a $7,000 tax credit per quarter in 2021. If an employee works for multiple companies within an organization, their credit calculation must be looked at across the entire aggregated operation. In other words, you can’t double dip to get a $5k credit for the same employee in two different entities that you own.
2. Calculating the loss to determine if you had a 50% decline for 2020 or a 20% decline for 2021 is based on the entire enterprise. So, if you have one location that is clearly eligible based on bad numbers in 2020, and two others that wouldn’t be eligible, that doesn’t matter. What matters is adding all of the numbers up at the top level of ownership. This may make it easier or harder for you to get the credit depending on your exact circumstances.
3. If one controlled entity qualifies, they all qualify! On the other hand, the GREAT thing about the aggregation rule is that if you have a complete or partial suspension of operations at one location, it applies to all other owned locations even if there were no suspensions at all at the other locations! For example, I know someone who owns 2 restaurants in a state that was subject to consistent bans on indoor dining and also owns 2 restaurants in a state that was not subject to any restrictions at any times. Even though only 2 of the 4 restaurants were actually subject to dining restrictions, all of the restaurants get the ERC.
The new Biden Administration stimulus law extended the ERC through the end of 2021. So, we have a lot more ERC to talk about. In the next few weeks, I’ll be explaining the new 2021 Employee Retention Credit rules and the recent Notice the IRS issued about the 2021 ERC.