Can You Claim the ERC for the Owner of a C or S Corporation?

Members of the tax community struggle with the “solo corporate owner” qualification for the employee retention credit (ERC).

In their recently published The Employee Retention Credit Guide, authors Alan S. Gassman, Brandon L. Ketron, Patrick D. Collins, and Ian McClean make this comment.

Wages paid to individuals that are “related” to a more than 50 percent owner of the eligible entity are not counted as wages for the purposes of the ERC, even though wages paid to an owner and the owner’s spouse will be counted.

Gassman, who writes for Forbes, is particularly well respected in the tax community.

But payroll service Gusto says differently. It says that the more-than-50-percent owner does not qualify for the ERC. And others, such as the accounting firm CliftonLarsonAllen, say this too.

What the IRS Says

In Q&A 59, the IRS explains the rule as follows:

59. Are wages paid by an employer to employees who are related individuals considered qualified wages?

No. Wages paid to related individuals, as defined by section 51(i)(1) of the Internal Revenue Code (the “Code”), are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has any of the following relationships to the employee’s employer who is an individual:

  • A child or a descendant of a child;
  • A brother, sister, stepbrother, or stepsister;
  • The father or mother, or an ancestor or either;
  • A stepfather or stepmother;
  • A niece or nephew;
  • An aunt or uncle;
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation.

If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.

If the Eligible Employer is an estate or trust, then a related individual includes a grantor, beneficiary, or fiduciary of the estate or trust, or any person that bears a relationship described above with an individual who is a grantor, beneficiary, or fiduciary of the estate or trust.

Our take. Since the corporation is not going to have a daughter-in-law, the IRS created a reference to the individual who owns more than 50 percent of the corporation. The IRS does not single out the corporate owner and makes no reference to the spouse. Using this information, the solo corporate owner qualifies for the ERC.

The Tax Code

Section 2301(e) of the Cares Act states: “20 (e) CERTAIN RULES TO APPLY. –For purposes of this section, rules similar to the rules of section 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 shall apply.”

IRC Section 51(i)(1) reads:

(i) Certain individuals ineligible.

(ii) Related individuals.

No wages shall be taken into account under subsection (a) with respect to an individual who —

(A) bears any of the relationships described in subparagraphs (A) through (G) of section 152(d)(2) to the taxpayer, or, if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation, or, if the taxpayer is an entity other than a corporation, to an individual who owns, directly or indirectly, more than 50 percent of the capital and profits interests in the entity (determined with the application of section 267(c),

(B) if the taxpayer is an estate or trust, is a grantor, beneficiary, or fiduciary of the estate or trust, or is an individual who bears any of the relationships described in the subparagraphs (A) through (G) of section 152(d)(2) to a grantor, beneficiary, or fiduciary or the estate or trust, or

(C) is a dependent (described in section 152(d)(2)(H) of the taxpayer, or, if the taxpayer is a corporation, of an individual described in subparagraph (A), or, if the taxpayer is an estate or trust, of a grantor, beneficiary, or fiduciary of the estate or trust.

Our take. Paragraph (A) is the big deal here. The tax code names the “individual” and the relationship to that individual, which you find in Section 152(d) — and, “if the taxpayer is a corporation,” the relationship to an “individual” who owns, etc. (and then lists the individual relationships to the various Section 152(d) people). Using this information, the solo corporate owner qualifies for the ERC.

Joint Committee on Taxation

The Joint Committee on Taxation, in its ” Description of the Tax Provisions of Public Law 116-136, The Coronavirus Aid, Relief, and Economic Security (CARES’) Act” report of April 23, 2020:

If a taxpayer claims a credit under this provision, rules similar to the rules of sections 51(i)(1) and 280C(a) apply. Thus, for example, an employee retention credit may not be generated by an individual employer hiring his or her children.

On February 10, 2021, the Joint Committee on Taxation makes the identical comment as above in its “Description of the Budget Reconciliation Legislative Recommendations Relating to Promoting Economic Security.”

Takeaways

First, we would like lawmakers or the IRS to clarify whether the corporation that pays its solo owner W-2 wages qualifies for the ERC on those wages.

Based on what we read from the tax code, the IRS, and the Joint Committee on Taxation, we see nothing that denies the ERC on the corporate payment of W-2 wages to a more-than-50-percent shareholder-employee (or his or her spouse).

And since the ERC is retroactively available to 2020, you may want that ERC money in your pockets now to help sustain your business.

Did you (or will you) claim the ERC on qualifying corporate wages paid to the more-than-50-percent shareholder-employee? We are claiming it. We think you should, too.

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