CRUCIAL TIPS ABOUT EMPLOYEE RETENTION CREDIT

Image from www.troutcpa.com

Sometimes it’s hard to tell when you qualify for the start-up employee retention credit (ERC). I wanted to share a story with you to help you see how it works so you can determine if you’re eligible.

My clients, Sue and Jim owned an S corporation split down the middle. They’ve operated successfully for the last 5 years, but last June decided to open another business with a third partner. This time around Sue and Jim each owned 35 percent of the business, but their new partner, John owns 30 percent.

The new business had gross receipts of $300,000 in the third quarter and $900,000 in gross receipts in the fourth quarter for a total of $1.2 million in gross receipts in 2021.

Here’s the question.

Are Sue, Jim, and John eligible for the ERC even though Sue and Jim already owned businesses?

The answer is ‘yes.’

The new business is just that – a new business. It started after February 15, 2020, and there are new owners (or a new owner). There is also a new set of books, so you started a new business, which means you qualify as a recovery start-up business.

Next, the business didn’t exceed average annual gross receipts of $1 million. Here’s how to figure it out. You use the gross receipts from the quarter prior to the calendar quarter used to determine the credit.

In 3^rd quarter, they earned $300,000. Take $300,000, annualize it (multiply by 12) and divide by 4 (4 quarters). In this case, average annual gross receipts are $900,000.

Finally, you must determine if the new business is an aggregate of an existing business. To be an aggregate, or single employer, you must have corporate taxpayers that are part of a controlled group, working as one employer.

This means there must be five or less people who own at least 80 percent of the total voting power. These same five people must have more than 50 percent of total voting power of all businesses.

In our example, Sue and Jim only own 35 percent of the new business each, so it’s not a single employer. Now, if Sue and Jim opened the new business without John and they each owned 50 percent of the business, it wouldn’t pass the test as it would be a single employer.

As you can see, it gets complicated determining if you qualify for the ERC, but many business owners do and don’t realize it.

Don’t let that happen to you. Contact us today at 714-383-2307 to go over your situation and see if your new business qualifies you for the ERC and a lower tax liability.