So this is how it goes when you work with taxes. One day you look at something and come to one conclusion. The next day you look at the same thing and come to a different conclusion.
Yesterday, I wrote about how shareholder wages don’t count toward the ERC. I have been engaged in a discussion with 5 other tax pros on this subject for the last 2 weeks, and we go back and forth on this.
One: isn’t this a sad statement about the state of our tax code? And two: all of us in this discussion are licensed professionals who work with this stuff every day and put thought and care into everything we do, which I guess leads back to the first point.
Here is what I now think, and I “think” this is the final answer.
Shareholder wages probably DO count; wages paid to (most) relatives DO NOT count.
What the CARES Act says: the CARES Act refers to Section 51(i)(1) for limitations on the ERC. Section 51 is the Work Opportunity Credit; (i)(1) refers to wages which do not count toward the WOC.
Section 51(i)(1) says, referring to wages which do not count toward the WOC: wages do not count if paid to anyone who: “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 any 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))…”
So now let’s go to 152(d)(2) and subparagraphs A through G. This section of the code refers to claiming someone as a dependent, but the gist of what Section 51(i)(1) is getting at is defining who has a “relationship” which prevents those wages from being counted. Under 152(d)(2)(A through G), the following are listed:
- Children or “their descendents” (i.e. grandchildren, great-grandchildren, etc)
- Brothers and sisters, including step-brothers and step-sisters
- Mothers and fathers, including steps, “or an ancestor of either” (i.e. grandparents)
- Sons or daughters of brothers and sisters (i.e. nieces and nephews)
- Brothers or sisters of your parents (i.e. aunts and uncles)
- In-laws of all types: father-in-law, mother-in-law, daughter-in-law, son-in-law, brother-in-law, sister-in-law
Okay, so if we look at this list, THESE employees would not count toward the ERC. But there’s nothing here that seems to prevent the shareholder themselves from counting.
Also not on the list of prohibited relationships: the shareholder’s spouse.
What about the Section 267(c) reference in Section 51(i)(1)? Section 267(c) refers to ownership attribution. So if you own 80% of a company and your child owns 20%, your ownership is “attributed” to your child, so your child is considered to own 100% of the company under the attribution rules. (Note: when claiming income on their personal tax return, they still claim only their 20%; the attribution rules mainly place limitations on certain things … such as the credits we’re talking about here.)
When we do this deeper examination, it seems like the best conclusion is: if a company qualifies for the ERC, the shareholder’s wages would seem to count. So would wages paid to the shareholder’s spouse. But wages paid to other relatives such as children, parents or siblings, would not count.
I reserve the right to change my mind on this, as I have done about 5 times in the last two weeks, but I “think” this is my final answer. And of course you are welcome to contact me with your thoughts to try and change my mind or add more to the discussion.