As business owners navigate the complexities of the Employee Retention Credit (ERC), one critical yet often overlooked aspect is the aggregation analysis. This analysis can significantly impact your ERC claims, especially if you own multiple businesses.

What is Aggregation Analysis?

At its core, the aggregation analysis involves combining multiple entities when determining eligibility for ERC. This is crucial when business owners have multiple independent trades or businesses. These separate entities must be “aggregated” or combined as one for ERC purposes, particularly regarding the gross receipts test and partial suspension rules.

Why Does Aggregation Matter?

The aggregation rules can have a profound effect on ERC claims. By combining multiple businesses, a business owner may either qualify or disqualify for the credit. The impact of aggregation is seen most clearly when businesses are assessed based on their total gross receipts or partial suspension of operations but often overlooked is employee count of the aggregated business.

For example, in cases where one business experienced a partial suspension of operations, but others didn’t, aggregation may still allow the entire group of businesses to qualify for ERC.

Types of Control Groups

When applying aggregation rules, two key control groups come into play:

1. Parent-Subsidiary Control Group: In this scenario, a parent corporation owns more than 50% of the voting power in a subsidiary business. All entities in this chain must be aggregated for ERC purposes.
2. Brother-Sister Control Group: This is more complex and involves two conditions:
   • 80% Ownership: The same five or fewer people must collectively own at least 80% of the entities.
   • 50% Identical Ownership: The same group must own more than 50% of each entity. If both conditions are met, the businesses are aggregated.

For example, if Person A owns 51% of multiple businesses, and Person B holds 49%, these entities will likely be combined under the aggregation rules.

Aggregation in Practice: Real-World Example

Let’s consider a real-world scenario. Person A owns a restaurant and a grocery store. Even if only one business qualifies for ERC based on its gross receipts or operational suspension, the aggregation rules mean that both the restaurant and the grocery store are evaluated together, even though they are separate trades or businesses.

This can have significant implications for the final ERC claim, especially when businesses have varying levels of impact from COVID-19 restrictions.

Why is Aggregation Often Overlooked?

Many business owners or tax professionals fail to account for the aggregation rules, either overlooking them entirely or misunderstanding their application. Some businesses may inadvertently miss out on ERC claims because they didn’t realize they qualified under the aggregation rules. Conversely, others may claim the credit when they shouldn’t have, leading to potential issues with the IRS down the line.

How to Approach Aggregation Analysis

Given the complexity of these rules, it’s vital to consult with a professional experienced in ERC and aggregation analysis. Understanding how control groups and ownership structures work is key to maximizing your ERC claim while ensuring compliance with IRS regulations.

Aggregation analysis is an essential component of the ERC eligibility process for business owners with multiple entities. Failing to account for these rules can result in missed opportunities or compliance issues. Make sure you’re properly assessing the ownership and control structures of your businesses to determine how aggregation affects your ERC claim.

If you have any questions about these requirements or need assistance with your ERC documentation, click here to reach out to us to review your documentation! 

Disclaimer: We want to remind you that while we do have expert tax attorneys and tax professionals working on our team and for our clients, this blog is not legal or tax advice. But we do want to help. Reach out and schedule a time to speak with me or one of my teammates to review your unique set of facts and circumstances and see how we might be able to help you.