More Guidance on ERC Gross Receipts

• January 13, 2022
• Paul Neiffer

We have gotten numerous comments and questions regarding our last post on the Employee Retention Credit (ERC) gross receipts.  The main question seems to be why we must include other business and personal income when we calculate gross receipts.

Tax rules have almost always treated business income under common control as |”one” business for purposes of calculating gross receipts.  If each business were to stand on its one, it would be very easy for a taxpayer to start a new business simply to keep gross receipts under a certain number. 

For example a C corporation is not a C corporation if gross receipts are under $27 million. Once you go over $27 million (indexed) the corporation has to switch from the cash method of accounting to the accrual method.  Lets assume Sam owns a C corporation and its gross receipts is $26.9 million.  He creates a new C corporation with $2 million of gross receipts.   If they stand alone, then each is not considered to be a C corporation and can be on the cash method.  But because Sam owns 100% of each corporation, they are both considered to have $28.9 million of gross receipts.

The rules for ERC gross receipts for whether to include other entities is as follows:

• Parent-Sub rules – Any entity owning more than 50% of another entity is included,
• Brother-Sister rules – We need to meet two tests.  First, do the top five owners own more than 80% of each entity.  Second, is the common ownership of those top five greater than 50%.  If you meet both tests, then you have to include all of the gross receipts to determine if you have a 20% or more reduction.

If someone owns more than 50% of any entity, then they are also deemed to own any related party’s ownership too. 

If you meet either of these tests, then all of the entities qualify for the ERC even if one of them did not have a gross receipts reduction.  Remember this is an “aggregated” calculation not a stand-alone calculation.

For example:

Sam has a Schedule F and also owns 60% of SJ Farms LLC and his adult daughter Jane owns the other 40%.  The Schedule F has gross receipts in the first quarter of 2019 of $500,000 and SJ has gross receipts of $1 million.  In the first quarter of 2021, Schedule F gross receipts are $500,000 and SJ has gross receipts of $500,000.  Since we are required to aggregate both entities gross receipts, Sam is able to meet the gross receipts reduction since they declined by 33.3%.  Both the Schedule F and SJ is able to claim the ERC.

Now, let’s change the ownership of SJ Farms, LLC to be 40% by Sam, 40% by Jane and 20% by an unrelated third party.  In this case, Sam is now not deemed to own 100% of SJ since he does not count Jane’s ownership and he does not control more than 50% of the SJ Farms, LLC.  Therefore, the Schedule F gross receipts did not decline.  This means Sam cannot claim the ERC for his Schedule F for quarter 1 of 2021 but SJ Farms can.

As you can see this can get very complicated very quickly.  It is extremely important to have a qualified tax advisor help you in determining the ERC since it is not simply looking at your Schedule F.

 

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