ERC Controlled Group Rules
The determination of ERC eligibility is based on a controlled group basis, where all members of an aggregated group treated as a single employer under section 2301(d) of the CARES Act are included as eligible employers for the Employee Retention Credit. 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.” This means that if multiple businesses are controlled by common ownership, they are considered as one entity for certain ERC purposes, including:
(a) whether the employer has a significant decline in gross receipts,
(b) the number of average employees, and
(c) 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.” 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.” 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.” Basically, combinations of parent-subsidiary and brother-sister groups will be classified as controlled groups.
The examples below may provide a better understanding of the correlations between the IRS aggregated group definition and the rules governing ERC qualifications.
ERC Controlled Group Examples
Example 1. Partial Suspension
Assume John is the sole owner of three businesses: two restaurants and John’s Commercial Construction Company. John can demonstrate a partial suspension of operations at both restaurant locations, because the restaurants were subject to pandemic-related governmental indoor dining bans. However, no similar partial suspension due to any governmental orders applied to John’s Commercial Construction Company (which remained operating as an "essential business" during the pandemic). Additionally, John's Commercial Construction Company did not experience a decline in gross receipts (indeed, its revenue increased throughout the pandemic).
Since John is the sole owner of all three 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 three companies will be deemed a single employer when determining whether the group qualifies based on significant decline in gross receipts. Here the gross receipts did not go down over the entire group, and so only two of the businesses that were actually subject to indoor dining restrictions, will be ERC eligible due to the partial suspensions resulting from the governmental orders impacting the restaurants.
Example 2. Gross Receipts
John owns a construction company, Buy Fix Flip, and two restaurants, Good Eats and Meat Lovers. In 2020, Buy Fix Flip had gross receipts of $450,000 in Q2, which were 45% of those in Q2 of 2019 ($1,000,000). On the other hand, Good Eat’s Q2 gross receipts were $8,000—80% of those in Q2 of 2019 ($10,000), and Meat Lovers’ Q2 gross receipts were $7,000—70% of those in Q2 of 2019 ($10,000). Since John 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 restaurant would have qualified, because their gross receipts declines did not reach the 50% threshold.
*Note that in 2021, employers only need to show a 20% decrease.
Example 3. Number of Average Employees and Calculation of Qualified Wages
Almost the same facts as Example 2 above, except that John’s solely owned Big Corporation in turn solely owns all of Buy Fix Flip, Good Eats, and Meat Lovers, 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 Buy Fix Flip 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. Its plausible a single employee worked for more than one entity and in such case the wages would be subject to allocation.
The ERC is currently accessible to all, including controlled groups. This means that if you own multiple businesses, regardless of whether their operations are related, and the rules consider them as a single employer, then all of your businesses could be eligible.