The Employee Retention Tax Credit: Aggregation Aggravation

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Employers navigating the incentives included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) must undertake the complex analysis of determining whether, and to what extent, they qualify for the employee retention tax credit (ERTC). Several aspects of this determination, including the calculations of gross receipts or the average number of full-time employees, may vary based on whether related entities are aggregated as a single employer. Further, because the ERTC is not available to employers who receive forgivable SBA loans under the CARES Act’s Paycheck Protection Program, receipt of such loans by related entities may preclude an employer from claiming the ERTC. For a complete discussion of the ERTC requirements, see our alert, President Signs $2 Trillion CARES Act With Significant Tax and Workforce Relief for Businesses and Individuals.

The ERTC aggregation rules may be familiar to many employers as modified versions of retirement and savings plan nondiscrimination rules. Generally, employers will be aggregated if they are:

  • Members of a controlled group of corporations or entities under common control, including as parent-subsidiary, brother-sister or a combination thereof.
  • Part of the same affiliated service group.
  • Otherwise considered to be a single employer by the Department of Labor under its anti-abuse rules.

For ERTC purposes, a controlled group of corporations is based on the deemed or actual ownership of 50% or more shares, by vote or value. Common control of noncorporate entities generally is based on the deemed or actual ownership of certain 80% or greater interests and, for potential brother-sister entities, 50% or greater common interest among five or fewer common owners.

Application of the aggregation rules can be complex and fact-specific. Employers planning to take advantage of the ERTC should consult with their tax advisors to determine whether aggregation could impact this analysis.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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