Can I Claim the Employee Retention Credit If I Sold My Business?

The ERC has provided substantial payroll tax relief to companies during COVID-19. A common question that arises is whether the credit can still be claimed if the business received the funds but was then sold. The answer depends on the timing and structure of the sale.

ERC Refresher

Let’s first recap how the ERC works:

  • Provides credit up to $7,000 per employee for 2021 quarters
  • Applied to qualified wages, health/retirement costs
  • Requires 20% revenue decline to qualify
  • Offset against payroll taxes and is refundable

Billions in relief have been provided to retained employees under the program.

Claiming ERC After a Sale

The key factors determining if ERC can still be claimed after a business is sold include:

When Sale Finalized Relative to Qualified Quarters

If a business qualifies for ERC in quarters prior to the sale, the credit is still allowed even if it’s claimed after the sale closes.

Whether Liabilities Were Assumed

If the buyer assumed payroll tax liabilities, they likely assumed rights to any outstanding ERC as well.

Allocation of Sale Proceeds

The purchase agreement likely spelled out who claims outstanding ERC and how proceeds are allocated.

Type of Business Sale

Asset sales vs. equity sales have different implications on ERC eligibility after transactions.

Substantiating Eligibility

To claim ERC after a sale, thorough records are crucial to prove:

  • Revenue declines and COVID impact prior to sale
  • Qualified wages, health costs, retirement contributions
  • Quarterly headcounts proving size tests
  • Sale agreement terms on tax liability assumptions

Documenting eligibility and credits prior to deal closure enables claiming earned amounts.

Utilizing Tax Experts

Interpreting complex purchase agreement terms on tax liabilities and structuring transactions to maximize ERC requires expertise. Engaging tax professionals can help ensure no credits are left unclaimed.

Conclusion

With proper planning and documentation, ERC credits from quarters prior to a sale may still be claimed after transactions close. But specific deal terms and tax technicalities apply, making professional guidance vital.

Key Considerations in Purchase Agreements

When structuring a business sale, some key ERC-related items to address in purchase agreements include:

  • Specifying who can claim ERC credits from pre-sale quarters
  • Defining how to allocate sale proceeds related to expected ERCs
  • Establishing a process for sharing data to substantiate credits
  • Representations on meeting ERC requirements prior to closing
  • Tax indemnities protecting both parties on ERC compliance
  • Employment and payroll tax liability assumptions
  • Covenants on filing quarterly returns and amending past filings
  • Cooperation requirements for resolving ERC audits

Thoroughly addressing these points in deal documents provides clarity and helps maximize the total credits claimed.

Claiming Process After Sale

The typical process to claim ERC after a sale would include:

  • Gathering required data from a seller on qualified wages paid before the sale
  • Reviewing purchase agreement terms related to tax liabilities assumed
  • Filing Form 941 for the quarter with qualified wages, with required details
  • Completing Form 3800 and 5884-C reporting ERC amounts
  • Amending prior 941 returns to claim ERC for earlier qualified quarters
  • Reflecting ERC claims in financial statement footnotes

Asset vs. Stock Sales

Whether a sale is structured as an asset purchase or stock purchase can impact the ability to claim ERC:

  • Asset purchase – Buyer unlikely to acquire payroll tax liabilities to claim ERC
  • Stock purchase – Historic payroll tax liabilities transfer, enabling ERC claim

Purchase agreements should clearly specify treatment to optimize the total credits claimed.

Here is an FAQ section to supplement the article:

Frequently Asked Questions

Can I claim ERC after selling my business?

Yes, for qualified wages paid prior to the sale. But documentation and purchase terms are key.

Does ERC eligibility transfer to the buyer?

Typically no, unless payroll tax liabilities are assumed. Eligibility is based on revenue declines while operating.

Who claims ERC after an asset sale?

With an asset sale, the seller retains the right to claim ERC after the transaction closes based on pre-sale payroll.

What about ERC claims after a stock sale?

For a stock sale, the buyer typically acquires the full right to claim ERC related to pre-acquisition wages.

How should purchase agreements address ERC?

They should spell out who claims ERC, data sharing, liability assumptions, allocation of sale proceeds, and cooperation requirements.

What records are needed to claim ERC post-sale?

Detailed wage data by quarter, revenue substantiation, headcounts, health/retirement costs, and purchase terms.

Should I amend past returns after a sale to claim added ERC?

Yes, amend prior quarter returns before expiration windows close to maximize recoverable ERC.

Who can help interpret complex sale agreements?

CPAs and tax attorneys can provide guidance on properly handling ERC and optimizing total credits.

Are there risks in claiming ERC post-sale?

Yes, insufficient data and documentation or misinterpreting purchase terms could result in ERC claim denial and penalties.

Where can I learn more?

IRS rules on ERC and advisor guidance on handling credits related to business sales.

Resources on ERC and Business Sales

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