Thread by @danchodan

Relatives of a greater than 50% owner are not eligible wages for ERC.

But are relatives of a LESS THAN 50% owner eligible for ERC? You would think so, but often even these relatives are ineligible.

Let's look at a very common example:
1/x

An S-Corporation is owned 50/50 by unrelated individuals, A and B. Each owner has a son employed in the business as well - Y and Z.

In total, the S-Corporation has four employees: owners A and B, and sons Y and Z.
2/x

The sons are obviously relatives of the owners, but since neither owner has greater than 50% of the S-Corporation ownership, there are no disallowed relative's wages. Right?

If this were the extent of the facts, I would agree. All four employee's wages qualify for ERC.
3/x

But let's add one important fact.

Like so many small businesses, A and B have chosen to organize their operating business into an S-Corporation, but they have chosen to purchase their business real estate in a separate LLC-partnership with the same 50/50 ownership.
4/x

Here is where ownership attribution rules become frustrating. A and B are unrelated owners. However, because A and B are partners in the real estate partnership, their ownership in the S-Corporation is attributed to each other. This makes both A and B 100% owners.
5/x

Now you see the problem.

If both A and B are 100% owners, then all of their relative's wages are ineligible for ERC by nature of being related to a greater than 50% owner. So the wages of sons Y and Z are disqualified. (Impermissible relationships of 152(d)(2))
6/x

How did this happen? The headache comes from the partner-to-partner attribution rules of 267(c)(3).

An individual owning stock in a corporation is treated as owning the stock held by his partner.
7/x

I do not have an explanation for the purpose of this rule. It makes no sense. Family attribution rules I understand - taxpayers can't benefit by creatively restructuring ownership among family members. But why do we pull in partners here?

It doesn't matter. It's the rule.
8/x

So we end up with a frustrating result. Y and Z's wages are ineligible for ERC just because A and B decided to start a separate partnership together.

But what about A and B's wages, do they qualify?
9/x

If you have read this far, you probably already know how a >50% owner's wages are disqualified for ERC due to family attribution rules. However, the facts are different here. A >50% owner is only disqualified for ERC when their ownership attributes to a family member and
10/x

then creates a disqualified relationship for the >50% owner to a >50% indirect owner. We can't do that here due to limits on reattribution of 267(c)(5) and 1.267(c)-1(a)(3). This means we can't first attribute partner-to-partner and then reattribute via family attribution.
11/x

So A and B's wages are safe and still eligible for ERC if they are only >50% owners due to partner-to-partner attribution. At least there is some silver lining!
12/x

All of this means that there are many hidden traps for ineligible ERC wages lurking in the details. What seems like a slam dunk may end up being limited. A business with 5 unrelated 20% owners seems safe - but if the same owners own the real estate partnership, watch out!
13/x

If you are interested in further reading about this topic, here is a thread where I walk through the examples in the regs on how partner-to-partner attribution works.

https://twitter.com/danchodan/status/1359998913516871687

14/x

In case you missed it, @edzollars wrote a fantastic summary of why a >50% owner's wages are ineligible for ERC due to family attribution rules.

https://twitter.com/edzollars/status/1378473237663768576

15/x

Here is a template where you can schedule out business ownership and limitations based on these attributions rules:

https://twitter.com/danchodan/status/1361423170964578308

16/x

To summarize:

Wages to relatives of ANY owner can be ineligible for ERC if there is also a partnership.

We have to look at more than >50% owners.
#TaxTwitter
17/17