Three Ways a Change in Ownership can Impact ERC Value

At a glance

• The main takeaway: Companies involved in an acquisition or disposition during 2020 or 2021 have additional considerations for determining eligibility.
• Impact on your business: Any acquisition could impact your gross receipts analysis and your eligibility for the ERC.
• Next steps: Contact Aprio to assess your ERC eligibility and understand the impact any recent transactions may have had on your credit value.

The full story:

When it comes to determining a company’s Employee Retention Credit (ERC), there are potential complexities at every turn. Accurately claiming the ERC requires careful attention to numerous factors and circumstances that could undermine the credit value or bring unwanted risk, from determining qualified wages to preparing appropriate documentation.

Companies that were involved in an acquisition or disposition face a particularly unique set of decisions that impact their potential opportunities for ERC, driven by three main factors:

1. Impact on gross receipts

For an employer to qualify for the ERC, it must demonstrate that it experienced one of the following two conditions: a full or partial suspension of business due to COVID-related government mandates OR a significant decline in gross receipts from 2019. However, determining whether an employer experienced a significant decline in gross receipts becomes more complicated if it was acquired or disposed of in 2020 or 2021.

The IRS clarified that an employer acquiring another business may include that business’s gross receipts in the total gross receipts computation when determining eligibility for the ERC. In other words, if you acquired a business in 2020 and want to claim the ERC for any quarter in 2020 due to a significant decline in gross receipts, your gross receipts analysis can reflect the total gross receipts of both businesses in 2020 as compared to the total gross receipts of both businesses in 2019.

2. Nature of the transaction: stock vs. asset

Another critical factor of an acquisition or disposition that could impact an employer’s ERC opportunities is the structure of the transaction. If the business acquisition or disposition is consummated through a stock purchase/sale, then the employer technically remains unchained because the business continues under the same EIN – only the owner of the business employer has changed. This technicality allows the new owner to retroactively claim the ERC for the acquired business, even for periods before the acquisition.

To the contrary, if the transaction was consummated through one company acquiring the assets of another, this would trigger a formal change in the employer through a change in the EIN for the acquired operations. The new owner could only claim the ERC for the period(s) under their ownership and the seller could retroactively claim the ERC for period(s) under their ownership, even post-transaction.

3. Controlled group analysis

Where there are business transactions, there are likely controlled groups, which play a significant role in determining ERC eligibility. I’ve talked previously about how aggregation rules impact ERC calculations and value, and understanding these nuances becomes even more critical in regards to acquisitions and dispositions. Any changes in ownership can shift the relationship among related companies and change a company’s status from a small employer to a large employer, potentially resulting in a big hit to the credit value.

Accounting for these nuances when calculating an ERC after a change in ownership is just as dense and complex as it sounds and truly requires the discerning eyes of an experienced tax advisor to avoid potentially detrimental credit miscalculations.

Aprio’s dedicated ERC team is well-versed in these nuances and prepared to help you maximize your ERC value while remaining compliant with all the related regulations.

Related resources

• Do Owners’ Wages Qualify for ERC?
• Get Your Top ERC Questions Answered
• Are U.S.-based Subsidiaries of International Companies Eligible for the ERC?