How Mixing Family and Business Could Impact Your ERC
June 28, 2021
At a glance:
- Family attribution rules and the ERC: If your business has any shareholders that are also family members, family attribution rules mean your company may be part of a controlled group.
- Impact on your business: Being part of a controlled group doesn’t disqualify you from claiming the ERC, but it could impact your credit value.
- Next steps: Family attribution rules are extremely complex, so you need to carefully evaluate all of your shareholder relationships with the help of a knowledgeable advisor.
Don’t risk miscalculating your ERC and facing potential penalties. Contact Aprio’s ERC team to determine whether family attribution rules apply to your business.
The full story:
Calculating your company’s Employee Retention Credit (ERC) is no easy feat, especially once you factor in how your company’s ownership structure might impact your qualified wages. As with many other tax credits and incentives, eligible employers claiming the ERC must consider a series of complicated IRS guidelines to determine whether the company is part of a controlled group.
One of the more complex aspects of those guidelines requires understanding how familial relationships can impact ownership for tax purposes. As defined by IRC section 1563, family attribution rules establish that ownership interest must be shared among some family members, sometimes creating a controlled group where you may not have expected it.
If your company includes any shareholders related by blood or marriage, then the family attribution rules may apply – potentially limiting the total value of your ERC claim.
Know The Rules
Attribution of ownership means treating some shareholders as owning interest that they do not actually own – but only for the purpose of controlled group determinations. Family attribution rules result in combining certain family members’ ownership interests with a related person’s direct ownership. For example, if a mother and daughter each have a 30% stake in a business, applying family attribution rules would mean both are considered to own 60% of the company.
Section 1563 identifies a very specific list of relationships subject to the family attribution rules, including spouses, parents, children, and grandparents but excluding siblings and grandchildren. A visual representation may help you understand how attribution is shared between these relationships:
I want to emphasize that these rules only come into play when determining if your company is part of a controlled group, which is a critical component of calculating the ERC. Companies deemed to be within a controlled group must adhere to the related aggregation rules, which could potentially bump your company from a small employer to a large employer and impact your credit value. We discussed these aggregation rules in a previous article, explaining how being a part of a controlled group does not disqualify you from claiming the credit; however, it can significantly impact your credit amount and utilization.
Remember The Exceptions
As with all IRS guidelines, family attribution rules carry several notable exceptions and complexities. Here are some of the most common:
- Children over the age of 21 – Ownership is always attributed between parents and children unless the child is 21 years or older, at which time attribution depends on other direct and attributed ownership. Attribution between a parent and a child over 21 will only occur when the parent owns more than 50% of the business, either directly or through attribution with another family member.
- Attribution between businesses and individuals – For controlled group determinations, attribution can occur from company to individual but not from individual to company. In general, anyone with 5% or more ownership in a company subsequently owns a proportionate share of that company’s interests.
- Spousal attribution – ownership will always be attributed between spouses unless all four of the following criteria are met:
- The spouse has no direct ownership;
- The spouse is not an employee nor engaged in company management;
- The company’s passive investment income is below 50% of gross income for the year; and
- The owner’s interest is not affected by disposition restrictions that benefit the spouse or the couple’s minor children.
- Double-attribution – Generally, there is no double-attribution for controlled group purposes, meaning a parent’s ownership might be attributed to a child but not re-attributed to that child’s spouse. However, there may be double-attribution from a company to an individual. So if company ownership is attributed to a parent, that ownership may be re-attributed to a child.
While these scenarios are more common, there are even more potential exceptions and variances in the rules that could affect your company’s controlled group determination. This article only skims the surface of family attribution rules, meaning many more highly technical considerations may need to go into your company’s ERC calculation if you have related shareholders.
Failing to make an accurate controlled group determination could lead to miscalculating your credit and facing potential penalties in the future. You can ensure you are maximizing your credit while remaining compliant with all IRS rules and regulations by partnering with a knowledgeable advisor who is familiar with these types of complex determinations.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.