Three Ways a Change in Ownership can Impact ERC Value
April 14, 2022
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.
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- Get Your Top ERC Questions Answered
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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.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
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Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
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.