As promised, our latest blog continues to answer our most “frequently asked questions” from small business owners. This round, we explore the rules and challenges for owners of multiple businesses who are looking to qualify for the Employee Retention Tax Credit (ERC).
This is undoubtedly the most complex portion of the ERC program. That’s because even separate businesses under common ownership must be evaluated together for ERC eligibility.
Multiple Businesses and the ERC Tax Credit
Let’s start with what kind of ownership the IRS considers to be the same business, or “controlled group.” There are two main types of controlled groups — a parent-subsidiary in which one entity owns 50 percent or more of all companies, and brother-sister in which five or fewer people own at least 80 percent of each company in the group and have at least a 50 percent voting power. Furthermore, a third group, known as a combined group is a combination of parent-subsidiary and brother-sister companies. Whew!
Let’s look at some examples. Restaurants are a good one to explore. Many restaurant owners own several locations, either franchises or branches of an independent restaurant. For example, a multi-unit franchisee that owns five restaurants would be combined together to come up with the total number of employees and the total gross receipts of the business. This establishes the ERC based on year-over-year decline. This is extremely important since this aggregated amount determines whether the business can qualify for the ERC benefits.
To qualify for the ERC, you must have under 500 employees total between all of your small businesses. While it doesn’t matter if the kinds of businesses you own are related to one another, it does matter whether the controlled group rules are met for any business. You must aggregate the businesses as noted above.
Additional Rules for Multiple Business Owners
Let’s say you own a restaurant, a dry-cleaning company and a jewelry manufacturing company. If the ownership is controlled, all the businesses must be combined for ERC eligibility purposes.
You’ll need to stay under the 500-employee threshold when combining your average employee numbers from all of your businesses. As long as you qualify for the ERC because of the previous IRS rules — a partial or full suspension or sales decline against the same quarter in 2019 of at least 50 percent in 2020 and 20 percent in 2021 — you will need to follow some additional rules.
To begin with, for all businesses, the maximum ERC credit amount per employee is $5,000 for the year in 2020 and $7,000 per employee for each quarter in 2021 (max of $21,000 for the year). If any employee works for more than one company, keep in mind you can’t claim a credit for that employee in multiple companies.
Additionally, when calculating any losses to evaluate where you had the required 50 percent decline over 2019 in 2020 or a 20 percent decline in 2021, you must base it on the performance of the entire organization. For example, if one business is eligible based on poor performance in 2020 and two others performed well, all that matters is the aggregate of all numbers in totality. Whether this helps or hurts your chances to qualify for ERC funds depends on a number of factors.
Finally, if one controlled group qualifies for ERC tax credits, then they all do. One major benefit of the aggregation rule for business owners with multiple companies is that a full or partial suspension of business operations at one location applies to all of the other locations. Yes, you read that right. It applies even if you didn’t experience the same thing at your other locations.
Now this blog in particular may have your head spinning, and we get it. It’s a lot to work through. That’s why the ERC filing is NOT something you want to try to do on your own. When you choose ERC Specialists for your filing, we’ll answer all of your questions including whether owners of multiple companies can still qualify for the ERC. While the short answer is yes, the information above necessitates a tax and payroll expert to help you navigate this cumbersome process. Get in touch with ERC Specialists today, so we can get you the maximum ERC tax benefits available to you.