Mistakes Businesses Make Regarding ERTC Aggregation Rules
Thanks to the Employee Retention Tax Credit (ERTC), businesses that kept workers employed could be eligible to receive a tax refund of up to $26,000 per qualified employee.
However, the rules regarding the ERTC are complex, and if you’re not well-versed in the latest nuances of the rules, mistakes in Employee Retention Tax Credit claims can happen. Errors in filing for the Employee Retention Tax Credit can be costly.
On the one hand, it can result in expensive audits or penalties if you claim ERTC funds for which you are not eligible. On the other hand, if you don’t claim ERTC funds that you’re entitled to, you could be leaving significant money on the table.
One of the more confusing sets of ERTC rules regards aggregation. Here are three of the most common errors in ERTC claims, and how to avoid them.
What Is Aggregation in Terms of the ERTC?
Different business terms will vary in meaning, depending on the context. For purposes of the ERTC, aggregation refers to combining or grouping different business entities when calculating the ERTC credit. The purpose of the ERTC aggregation rules is to prevent businesses that have common ownership from being classified as divided to help them become artificially eligible to claim ERTC funds.
In other words, the ERTC aggregation rules help ensure that businesses that retain a common owner or are controlled by a single entity are treated as just one employer for ERTC eligibility determinations.
The list below includes three common ERTC filing mistakes businesses make when aggregating (or failing to aggregate) various entities.
1. Failure To Aggregate Affiliated Entities
If businesses are considered affiliated, they must be aggregated for purposes of determining whether the entity as a whole is eligible for the ERTC credit. Businesses may fail to aggregate entities that are considered affiliated under the aggregation rules.
As a result, a business may end up qualifying for a credit they’re not eligible to receive. This can happen if business owners pull from the same pool of qualified wages, exceed employee headcount thresholds, or inconsistently apply the rules. The result could be an audit, fines, and having to return ERTC funds.
2. Aggregating Entities That Are Not Affiliated With Each Other
On the opposite end of the spectrum is a business that mistakenly aggregates entities that shouldn’t be combined for purposes of claiming a credit.
There are complex and nuanced rules regarding determining common and affiliated ownership, so it’s a good idea to speak with an ERTC professional about these issues. Potential situations where aggregation could be applied include:
- Common ownership
- Controlled groups (for example, subsidiaries)
- Affiliated service groups (for example, professional service groups)
- Leased employees (temporary employees hired from an agency, for example)
Like failing to aggregate affiliated or common entities, mistakenly aggregating these businesses can have both similar and opposite effects. For example, you may end up claiming wages for an employee who should not be affiliated with your business.
3. Failure To Keep Accurate Documentation
To ensure IRS compliance in the event of an audit, it’s essential that you keep detailed documentation of how you have classified your businesses and employees, as well as the wages and benefits paid to each worker and owner.
Avoid ERTC Mistakes – Contact an ERTC Tax Professional
Avoiding ERTC pitfalls requires having an experienced ERTC tax professional review your documentation and file an ERTC claim that complies with the most current IRS guidelines. To date, Dayes Law Firm at 800.503.2000 has helped businesses claim more than $250 million in Employee Retention Tax Credits. To determine your eligibility and find out the potential size of your ERTC claim, contact us for a free consultation.