Claiming the ERTC is Complex for Family-Owned Businesses 

January 11, 2024
Dayes Law Firm

Family-owned businesses are an American staple, employing 60% of the U.S. workforce and accounting for 64% of the nation’s Gross Domestic Product (GDP). Family businesses go beyond having a common mission statement, prioritizing resilience over one-dimensional financial performance. After all, the goal is usually to keep ownership interests intact for multiple generations. 

However, no business is immune to financial downturns, and the COVID-19 pandemic created hardships for businesses across the country. The passage of the CARES (Coronavirus Aid, Relief, and Economic Security) ACT and the Employee Retention Tax Credit (ERTC) provided a financial lifeline to millions of people and businesses. 

The ERTC may be available to family-owned businesses, but whether this business structure can actually take advantage of ERTC business benefits depends on several factors. This article outlines the Employee Retention Tax Credit for companies that are family-owned. 

Implementing ERTC in Business 

As a reminder about the ERTC for business, companies could claim up to $26,000 per employee if they met one of two eligibility requirements: 

  1. Experience a significant decline in revenue in 2020 and 2021 compared to 2019. The exact decline required for eligibility is at least 50% in 2020 and at least 20% in 2021. Eligibility is determined on a quarterly basis.
     
  2. Be subject to a full or partial suspension of business operations as the result of a local, state, or federal government mandate. 

If a business meets these eligibility requirements, the next step is to identify which wages qualify for the ERTC refund. Family businesses, however, are subject to a variety of restrictions. 

The Challenges Family-Owned Companies Face When Claiming ERTC Funds 

When the ERTC for business was deployed, its purpose was to provide an economic stimulus and keep employees on payroll. Providing stimulus funds to families to keep their relatives employed could be contrary to this goal because a business that employs its family members is likely more inclined to keep everyone employed and paid.

Given this propensity to “protect their own,” the government put additional restrictions on which family-owned businesses can take advantage of ERTC and corporate tax credits. The concern when building these restrictions was that government funds could be used for “personal benefit” rather than economic stimulus. 

General Rules for Family-Owned Businesses Seeking to Claim ERTC Funds 

As a general rule, owners who pay themselves wages cannot claim those wages for purposes of the ERTC. Further wages paid to “related” employees are generally not eligible. 

The family members’ wages that are excluded from ERTC eligibility include the following: 

  • Children and grandchildren
  • Siblings (including step-siblings)
  • Parents and stepparents
  • Aunts, uncles, nieces, and nephews
  • In-laws
  • Individuals who reside in the owner’s household 

When Family-Owned Businesses Can Claim ERTC Funds 

Despite the above restrictions, a majority owner who has no living parents, siblings, or children can claim wages under the ERTC. Though recent IRS guidelines exclude most wages earned by an owner with living relatives, the rules shift when there are no living relatives. 

In other words, the wages paid to an owner and spouse can count toward qualified wages if there are no familial descendants. Spouses who own a business together and have no living relatives may also be eligible for ERTC funds.

Contact an Experienced Legal Professional To Determine ERTC for Business Eligibility 

Even with these exclusions, family business utilization of ERTC is still possible. To find out if your business qualifies for ERTC funds, contact Dayes Law Firm at 800.503.2000 for a free consultation.