Claiming the Employee Retention Credit when you own multiple entities

Do you qualify for the Employee Retention Credit (ERC)? Did you claim it?

It's not too late. You can still amend your 2020 and 2021 payroll tax returns.

Remember, this can be worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021, for a 2021 total of $21,000 ($26,000 per qualifying employee for 2020 and 2021 combined).

Example. Let's say you have 10 employees who fully qualify for the credit. That's a $260,000 tax credit (think cash): ($5,000 + $7,000 + $7,000 + $7,000) x 10 = $260,000.

Who must aggregate businesses?

When you own more than one entity, you face special rules when it comes to the ERC. And you don't have to own the other entity entirely to face the special rules.

Here are just a few examples of who has to aggregate businesses for purposes of the ERC:

• Howard operates his dental practice as an S corporation, and he also owns three rental properties that he deems businesses.

• Carla Corporation operates 11 subsidiary corporations located in seven states.

• Jack, Jake and Jim own one-third of four corporations.

Okay, so what?

When you aggregate the business entities into one for the ERC, you have to consider the following questions:

• Are you now (because of the aggregation) a small or a large employer under the 100 (2020) or 500 (2021) large-employer test?

• What does the aggregation of the businesses mean for your qualifying under the decline-in-gross-receipts test?

• What is the effect of a government COVID-19 shutdown or modification order on one of the entities, and how does it affect the aggregated group?

• How do you treat employees who work for more than one of the entities?

A little more

In most cases, identifying the group to aggregate is going to be straightforward, but it can get pretty complicated with some entities. The bottom line is that it's likely worthwhile to aggregate and see what's possible for the ERC.

When you aggregate, you look at gross receipts compared with 2019, and you also look to government shutdown orders. Obviously, you use the best results you find with either (a) the gross receipts drop or (b) the shutdown orders.

There's a pleasant surprise with the government shutdown order, because if that order affects one entity in the group, the IRS says it affects the entire group. For example, Sam owns five retail corporations. One was shut down by governmental order. That shutdown applies to all five corporations and can create tax credits with each of the five.

Jay Thompson is the president of Golden Empire Services LLC and a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csubsbdc.com.