ERTC Challenges Related to Divestitures When Ownership Changes

November 12, 2023
Dayes Law Firm

Many businesses struggled during the height of COVID-19. While COVID limited commerce travel and group meetings, some businesses laid off employees and others chose to divest. Moving forward with a divestiture may be a good call for your business, but how does it impact your Employee Reduction Tax Credit (ERTC) eligibility? 

The Employee Retention Tax Credit provided struggling businesses with aid. Now, such businesses can file retroactively for the tax credit. But what about businesses that experienced ownership changes? How are the ERTC and divestitures related? 

What Is the ERTC? 

The government introduced the ERTC through the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. Later, the Consolidated Appropriations Act modified the eligibility requirements to include more businesses. For example, it allowed businesses that already claimed Payment Protection Program loans to claim the ERTC, whereas the CARES Act hadn’t. 

Eligibility for the Employee Retention Tax Credit relies on your business experiencing a significant decline in gross receipts or a suspension of business operations due to a government mandate. When calculating your revenue decline, use the corresponding quarters from 2019. 

Types of Divestitures

When a business is underperforming, it may need to go through the divestment process. Divestitures involve selling business interests, assets, or investments. This might include sales, exchanges, closures, and bankruptcy. 

There are several types of divestitures, and each may impact the ERTC filing process differently. These types include: 

  • Carve-outs: A parent company sells part of its core operations through the stock market. The parent and subsidiary then work as separate entities.
  • Spin-offs: A parent company sells a division that forms a separate company, and shareholders receive shares from the new company.
  • Split-ups: A parent company sells a division that forms a separate company, and shareholders can choose whether they want to keep their shares with the parent company or move to the new company.
  • Sell-off: A parent company sells the divested business asset for cash.

How Divestitures Impact Filing for the ERTC 

Since divestitures involve transfers of ownership, they can impact the process of filing for the ERTC. When navigating the ERTC and divestitures, consider the following:

  • When the divestiture took place
  • The nature of the divestiture
  • Who owns the majority of the business 

Acquiring a Business

If you acquired a business through a divestiture, you should include the ERTC as part of your due diligence process. Determine whether the previous owner filed for the ERTC, and if they did, carefully review the relevant documents. Keeping detailed records is time-consuming but essential. 

Consulting the Equity Purchase Agreement

If the previous owner did not file for the ERTC, the equity purchase agreement should state whether or not you are entitled to ERTC benefits as the new owner. If the seller is in the process of filing for the ERTC, you have the power as the purchaser to approve or veto that decision. You must understand the benefits of the ERTC beforehand to carefully evaluate how it might help the business’s financial position. 

After Acquisition 

Challenges you might encounter after acquisition include: 

  • Discovering the seller filed for the ERTC without your knowledge or approval, making it unclear who is entitled to the funds
  • Protecting the company from an ERTC audit
  • If filing for the ERTC as a new owner, you cannot claim quarters during which you weren’t the owner if the business has a new EIN

Maximize Your ERTC Benefits With Experienced ERTC Attorneys

If you are worried about how divestitures impact your eligibility for the ERTC, contact Dayes Law Firm. Our team can address any concerns about the ERTC and divestitures, as well as any problems that arise. We work to simplify this otherwise complex process. 

Call 866-684-8114 today for a free consultation.