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FAQ: Controlled Groups and Aggregation

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Understanding the specifics concerning aggregation and controlled groups is crucial when dealing with the Employee Retention Credit (ERC) because it directly impacts a business’s eligibility, credit amount, and compliance with IRS regulations. Failing to consider these factors may lead to incorrect claims and potential consequences, such as penalties and the need to repay improperly claimed credits. By being well-informed about aggregation rules and controlled group regulations, businesses can accurately assess their eligibility for the ERC, calculate the appropriate credit amount, and maintain compliance with tax regulations, ultimately maximizing the benefits provided by this valuable tax relief program.

 

  1. How do aggregation rules apply to the ERC?

    Aggregation rules play a crucial role in determining eligibility and credit amounts for the Employee Retention Credit (ERC). Businesses that are part of a controlled group must combine their gross receipts, employee count, and wages when evaluating eligibility and calculating the credit. This ensures that the correct amount of tax credit is claimed while maintaining compliance with IRS regulations. 
  2. What is a controlled group in the context of the ERC?

    A controlled group refers to two or more related businesses with common ownership or control. They are treated as a single employer for tax purposes, including the ERC. Controlled groups help the IRS ensure that businesses don’t exploit tax credits by splitting their operations into multiple entities to claim additional benefits. 
  3. Why is it important to understand controlled groups when applying for the ERC?

    Understanding controlled groups is essential because it influences a business’s eligibility for the ERC, the credit amount, and compliance with IRS regulations. Controlled group rules can sometimes enable somebody to qualify for ERC who previously was ineligible due to their individual business entity not meeting the necessary criteria, but when combined with other related entities under common ownership or control, the aggregated financial data and employee counts may satisfy the eligibility requirements.  
  4. How does the IRS define common ownership or control for controlled groups?

    The IRS has established criteria to determine if businesses are part of a controlled group, there are three different types of controlled groups:  parent-subsidiary groups, brother-sister groups, and combined groups. The IRS evaluates factors like ownership percentages and controlling interests to identify if businesses share common ownership or control, requiring them to be treated as a single employer for tax purposes. 
  5. What is a brother-sister group?

    A brother-sister group is a type of controlled group under IRS regulations, where two or more businesses are owned by a group of five or fewer individuals, estates, or trusts that have a common controlling interest in each of the businesses. To qualify as a brother-sister group, these individuals must collectively own at least 80% of the total combined voting power or value of all classes of stock in each business and have more than 50% of the ownership interests with respect to each business, considering only the ownership percentages that are identical for each business. 
  6. What is a parent-subsidiary group? 

    A parent-subsidiary group is another type of controlled group defined by the IRS. In this case, one or more businesses (the subsidiaries) are connected through stock ownership with a common parent corporation. To qualify as a parent-subsidiary group, the parent corporation must own at least 80% of the total combined voting power or value of all classes of stock in at least one subsidiary. Additionally, each subsidiary must be connected to the parent corporation or another subsidiary within the group through an 80% or more ownership stake.

  7. What is a combined group? 

    A combined group is a type of controlled group that consists of three or more organizations with a combination of parent-subsidiary and brother-sister relationships. In a combined group, each organization is part of either a parent-subsidiary or a brother-sister group, and at least one corporation is a common link between the two types of controlled groups.

  8. What about unincorporated trades or businesses, can they fall under ‘common control?’ 

    Certainly, unincorporated trades or businesses may also be subject to falling under “common control.” A typical instance of this occurs when a business owner has a side rental property in addition to sole ownership of one or more businesses. In most situations, the income generated from these rental properties must be combined with the business owner’s other revenues when evaluating the gross receipts test.

  9. Can businesses within a controlled group claim the ERC separately? 

    No, businesses within a controlled group must aggregate their financial data, employees, and wages to determine eligibility and calculate the ERC for the entire group. However, it should be noted that each individual business entity must submit their amended tax return – in addition to their amended 941-X – separately from one another.

  10. How do family attribution rules impact controlled groups and the ERC? 

    Family attribution rules can affect controlled group determinations by attributing ownership across family members. This means that an individual’s ownership stake in a business may be considered as owned by their family members, such as spouses, parents, children, or siblings. As a result, businesses that might not otherwise appear to be part of a controlled group could be classified as such due to family attribution rules. This can impact the eligibility and calculation of the ERC for those businesses.

  11. What happens if a business incorrectly claims the ERC without considering controlled group rules? 

    If a business does not consider controlled group rules and incorrectly claims the ERC, they may face various consequences. These include penalties and the need to repay any improperly claimed credits. To avoid these issues, businesses should carefully evaluate their ownership structure and consult with tax professionals or legal advisors to ensure compliance with controlled group rules when claiming the ERC.

  12. How can businesses determine if they are part of a controlled group? 

    To determine if they are part of a controlled group, businesses should analyze their ownership structure and consult with a tax professional or legal advisor. These experts can help identify common ownership or control using the IRS’s specific criteria (Parent-Subsidiary, Brother-Sister, and Combined Group) and determine if the businesses should be treated as a single employer for tax purposes, including the ERC.

  13. Are there any exceptions to the aggregation rules for controlled groups and the ERC? 

    No. There are numerous ‘ERC mills’ dominating the industry presently who like to create the illusion that their clients can actually evade the aggregation rules altogether, this is unfortunately not true. Any business owner who ignores the aggregation rules when applying for the ERC is at risk for a painful audit.

  14. What documentation should businesses maintain to support their ERC claim, considering aggregation and controlled group rules? 

    Businesses should keep accurate records of their ownership structure, employee counts, wages, and any relevant calculations to support their ERC claim. Documentation may include organizational charts, payroll records, financial statements, and records of any consultations with tax professionals or legal advisors. Maintaining proper documentation can help businesses avoid potential issues with the IRS, such as penalties or disputes over improperly claimed credits.

 

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