How Should Business Partnerships Approach Claiming the ERTC?

October 25, 2023
Dayes Law Firm

You’ve probably been hearing a lot about the Employee Retention Tax Credit (ERTC) lately. The ERTC is a tax credit given to companies that were impacted by the COVID-19 pandemic in 2020 and 2021. 

Depending on various eligibility factors, businesses can claim up to $26,000 per employee, but what if you are part of a partnership? There are additional considerations regarding ERTC for businesses with multiple owners. Here are some of the basic guidelines. 

ERTC Eligibility and Qualified Wages 

The $26,000 per employee tax credit is based on qualified wages paid to employees for businesses that met one of the following criteria: 

  • A 50% reduction in gross receipts in 2020 and a 20% reduction in 2021 compared to the same quarter in 2019
  • A full or partial suspension of operations due to government mandates 

The specific eligibility rules have undergone several changes, and it’s important to speak to a tax professional or tax attorney to ensure that any ERTC claims you file comply with the current IRS regulations. 

For example, in the original iteration of the CARES Act (Coronavirus Aid, Relief, and Economic Security), businesses that received funds from the Paycheck Protection Program (PPP) and applied for PPP loan forgiveness were not eligible for the ERTC. That rule has changed, however, and the ERTC is still available for PPP funds that were not used to pay wages. 

What Are Qualified Wages for ERTC Purposes? 

Calculating qualified wages can also become complicated, and there are different rules based on the type and size of your business. Because the ERTC was meant to secure smaller organizations, businesses with 100 or fewer employees have more leniency when determining qualified wages. 

The wages that an employer would normally pay to the IRS in the form of payroll taxes can be claimed under the ERTC. This includes an employer’s share of Social Security tax, hospital insurance, and other expenses. To get the full scope of wages that are eligible for the tax credit, please contact a tax professional. 

Wages Paid to Owners and Partners 

As a business owner or partner in a business, you might be wondering if you can claim ERTC funds for wages paid to yourself. The short answer is that it depends. If your ownership interest is 50% or less, your wages do qualify for the ERTC. 

There is an important caveat to consider, however. If you have family members who also have an ownership stake in the business, their percentage of ownership will be added to yours, and therefore, your wages are not eligible for the tax credit. 

For example, if you own 45% of the business and your spouse has another 15%, your ownership interest is 60%. This number exceeds the ownership interest available according to current ERTC guidelines. 

“Family members” are a broad category and can also include aunts and uncles, nieces and nephews, and even in-laws and step-relatives. 

Other Considerations for Business Partnerships 

After determining that your business meets the eligibility criteria for the ERTC, there are other steps to take to ensure that you can claim the maximum credit allowed for your business while still complying with the IRS’s rules. 

Keeping detailed records of employee headcount, revenue, payroll, and qualifying criteria can make the process run more smoothly and ensure you get the full credit. As a partnership, keep in mind that you can claim the credit on your employment tax return, which is Form 941

Additionally, in September, the IRS announced “an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program” as a result of increased fraud concerns. 

IRS Commissioner Danny Werfel noted in the announcement, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” and urged that when it comes to claiming the credit, “businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

Contact an Experienced Tax Attorney for ERTC Guidance 

Dayes Law Firm has helped businesses file for more than $250 million in ERTC funds to date. To determine how much your business may be able to claim, contact us at 866-505-9860 for a free consultation.