Editor’s Note: Daniel Chodan, a tax partner with the Trout CPA firm in Pennsylvania, wrote the article that appears below. If you follow Dan on Twitter because of his contributions to #taxtwitter–and you should–you’ll recognize that this post elaborates on a fascinating insight he recently shared there regarding the PPP affiliation rules…
Expanded business relief programs have created new opportunities and pitfalls for groups of related businesses. Both the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) require certain related businesses to be grouped together to determine eligibility which creates unique scenarios when a recent or upcoming businesses acquisition is involved.
A Caution to Start
Owners of multiple businesses should be cautious and seek professional advice in these areas. The rules for combining businesses are complex and their application to current relief programs is likely to evolve. The rules are also inconsistent between the major programs as the PPP follows the SBA’s affiliation rules and the ERC follows the IRS’s controlled group rules.
PPP Affiliation Rules
Businesses are grouped for the first draw of PPP eligibility for the purpose of employing no more than 500 employees. For the second draw of PPP, businesses are grouped for eligibility purposes of employing no more than 300 employees and for determination of a quarterly decline in gross receipts of at least 25 percent
So how could affiliation affect a group of businesses? Consider an affiliated group example of a medical office and retail store owned by the same person. The medical office was an essential business and had consistent gross receipts in 2020 compared to 2019; however, the retail store was subject to a shutdown order and saw a dramatic decline in gross receipts in the second quarter of 2020. When the gross receipts are combined for the affiliated group, the group shows a decline in total gross receipts of more than 25 percent for the second quarter of 2020 which qualifies both businesses for the second draw of PPP loans.
How then could an acquisition affect a group of businesses? Consider the previous example but assume instead that the retail store was only acquired in September 2020. The acquisition took place after the second quarter of significant gross receipts drop, but the PPP combination of gross receipts for the business group applies for the entire period of measurement, not just the period after the acquisition. So both businesses again qualify for the second draw of PPP loans due to a combined decline in gross receipts of more than 25%.
It is unclear at this time how an acquisition in 2021 would be treated as current SBA rules only address affiliates acquired during 2020.
Employee Retention Credit Controlled Groups
Businesses are grouped for the ERC for the purpose of determining
- If there has been a quarterly decline in gross receipts greater than 50 percent
- Whether operations are fully or partially suspended, and
- Calculating the total number of employees (FTEs) to determine eligible wages.
So how could controlled group status affect a group of businesses? The ERC groups gross receipts of multiple businesses to determine if a decline in gross receipts occurred of more than 50 percent for 2020 eligibility and 20 percent for 2021 eligibility. The previous example of a medical office and retail store owned for all of 2020 would be treated similarly for ERC. Both businesses would be ERC eligible if the decline in gross receipts for the second quarter of 2020 exceeded 50 percent.
How then could an acquisition affect a group of businesses? Similar to the PPP example, a business acquired in 2020 must combine gross receipts for an ERC controlled group. However, a key difference is that the ERC only combines gross receipts for the calendar quarters which the business was owned and operated. So the previous example of the retail store acquired in September 2020 will not qualify the controlled group for ERC as the retail store’s second quarter gross receipts are not grouped (although it would be qualified under the PPP rules).
Another key qualification difference between PPP and ERC is eligibility based upon whether operations are fully or partially suspended due to COVID government orders. All members of an aggregated group are treated as a single employer for ERC, and if one member of the group is subject to suspension by governmental order then all members of the group are considered to have their operations partially suspended. So in the previous example of the retail store acquired in September 2020, assume the retail store is subject to a government order restricting its activity to only online sales and curbside pickup while the physical storefront is not allowed to admit customers. The retail store is subject to a partial suspension of operations which means the entire controlled group is eligible for ERC during the period of suspension.
Presumably, acquisitions in 2021 would be treated similarly for the ERC as the program was expanded to cover the first two quarters of 2021. However, there has not yet been updated IRS guidance on the ERC since the Consolidated Appropriations Act expanded the program in late December.
A Closing Caveat
This blog post is general in nature and is not intended to be, nor should it be, treated as tax or legal advice. As of 1/18/2021, the IRS has not issued critically important guidance related to the Consolidated Appropriations Act; so this is based on interpretations of the law itself, existing IRS FAQs, and current SBA rules. The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act, and various Internal Revenue Code sections is nuanced and complicated so professional advice may be needed.
Other Resources
The newest Interim Final Rules for PPP loans appear here: and
The statute the SBA uses for determining whether two entities count as affiliates appear
Dan Chodan’s biographical and contact information appears
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