What Are the ERC Family Attribution Rules?

July 11, 2023
Dayes Law Firm

Family businesses are incredibly popular. Many companies rely on their family members to help with business operations. Sometimes, however, working with family members can become complicated — especially when it comes to applying for the ERC.

What are the ERC family attribution rules, and how might they affect how much credit you can claim? Dayes Law Firm is here to offer guidance.

How Does the ERC Work?

Many businesses felt the impact of COVID-19. Pandemic restrictions limited business operations and reduced revenue, forcing companies to find ways to cut costs.

The Employee Retention Credit (ERC) aimed to protect employees and aid struggling businesses. You could qualify for the ERC if:

  • You experienced a significant decline in gross receipts
  • Your business had either fully or partially suspended operations

With the ERC, eligible employers can claim credit based on how many employees they have. In 2020, you could claim up to 50% of qualified wages, with a cap of $10,000 per employee for the year; in 2021, that percentage rose to 70%, with a cap of $10,000 per quarter.

Who Can You Claim the ERC For?

Theoretically, a business should be able to claim qualified wages for any employee. However, there are some exceptions — specifically, those related to familial relationships.

If you’re a majority owner, you generally cannot claim your wages if you have living siblings, half-siblings, ancestors, or descendants. In addition, if you employ family members — such as a child, parent, or in-laws — you can’t claim their wages.

Additional complications exist regarding ERC family attribution and constructive ownership rules. These rules determine whether your company is part of a controlled group and may affect how much credit you can claim.

What is Family Attribution and Constructive Ownership?

In the eyes of the IRS, certain family members may have a share in the company, even if they don’t directly own it. This is known as “family attribution” or “constructive ownership”; parents, spouses, grandparents, and children may all have this indirect ownership. In addition, some family members’ ownership interests will be combined based on certain attribution rules.

What this means for the ERC is that some individuals may be considered shareholders who weren’t before and that those shareholders may have a higher investment percentage than you initially thought. This, in turn, means you may have to apply as a controlled group.

Exceptions to the Family Attribution Rules

Not every family member falls under the ERC family attribution rules. Siblings and grandchildren, for example, aren’t included.

In addition, even individuals who would normally qualify may be exempt; those exemptions include the following:

  • Children over the age of 21, unless the parent owns more than 50% of the company
  • Spouses who don’t directly own the company and who don’t work at the company or help with management (though certain other requirements apply)
  • Many cases of double attribution (for example, a child’s spouse would be exempt)

Reach Out to Dayes Law Firm PC for Assistance

Family attribution rules are complex. Trying to navigate them can be difficult, especially if you haven’t done so before. Partnering with a qualified attorney could help make the process easier.

At Dayes Law Firm, we have a thorough understanding of the ERC family attribution rules. We use our knowledge and years of experience to guide clients and provide advice. Our attorneys can help you determine how family attribution may affect your company, how to apply for the ERC, and more.

Learn more about how our firm can help you. Call 800-503-2000 or fill out our contact form to request a free consultation.