The recent revisions to the Employee Retention Credit (ERC) are proving to be very impactful to one particular industry – the restaurant industry. As mentioned in our previous ERC article, restaurants that received PPP loans are also eligible to claim the ERC. Now, when analyzing the ERC, many restaurants have posed some of the same questions regarding eligibility and calculation of the credit.
Eligibility
Question: My restaurant is currently required to close at an earlier hour than its regular closing time due to a statewide government curfew. Is my restaurant considered partially shut down for purposes of determining eligibility for the ERC?
Answer: Yes. According to FAQs published on the IRS website, a governmental order includes an order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period.
Question: Under a government order, my restaurant is required to reduce the seating capacity of our indoor dining room to accommodate for social distancing. However, the indoor dining room is open, and we are still able to offer delivery and carry-out. Is my restaurant considered partially shut down for purposes of determining eligibility for the ERC?
Answer: It depends. IRS guidance says that if all of an employer’s business operations may continue, even if subject to modification (for example, to satisfy distancing requirements), such modification of operations is not considered to be a partial suspension of business operations due to a governmental order, unless the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances. The IRS guidance does not define “nominal,” so each employer’s fact pattern must be reviewed on a case-by-case basis.
Question: Our company owns restaurants located in California, North Dakota and Utah. The restaurant locations in California were required to shut down due to government order. The ones in North Dakota and Utah were not. Is our company considered to have a suspension of operations due to a government order?
Answer: Yes. According to IRS guidance, employers that operate a trade or business in multiple locations and are subject to state and local governmental orders limiting operations in some, but not all, jurisdictions are considered to have a partial suspension of operations. In this example, the company has a partial suspension of operations because of the government order in California. The partial suspension results in the company being an eligible employer nationwide. For a company that has set up separate legal entities for each state’s restaurant locations, it will need to consider the ERC’s aggregation rules.
Aggregation Rules
Question: Our restaurant, a limited liability company (LLC), is owned 100% by one individual. That individual also owns 100% of two other restaurants that are also LLCs. Are we required to look at the three entities as one single employer for purposes of the ERC?
Answer: Yes. Under the ERC, employers are required to review the aggregation rules. All entities that are treated as a single employer under section 52(a) or (b) of the Internal Revenue Code or section 414(m) or (o) of the Code are considered one employer for purposes of the ERC. The aggregation rules can significantly impact a group of related entities’ ERC, so these rules must be taken into consideration when determining eligibility and calculating the ERC.
Qualified Wages
Question: Is my restaurant required to include part-time employees in the calculation of employees to determine if we are a large employer for calculating qualified wages?
Answer: No. Part-time employees are not included in the calculation of employees to determine large employer status. A company must calculate the average number of “full-time” employees employed during 2019. The IRS guidance for the ERC states that a “full-time” employee means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. Restaurants should remember to count both the restaurant employees and those that work at their corporate office. They also need to keep in mind the aggregation rules discussed above when calculating the number of full-time employees.
As a reminder, the definition of a large employer for 2020 ERC was defined as more than 100 full-time employees, and for 2021 ERC is defined as more than 500 full-time employees. Both full-time employee counts are based on 2019 full-time employee counts.
Question: When calculating qualified wages, should we include the wages of only the full-time employees or all employees?
Answer: If the company is a large employer for purposes of the ERC, qualified wages are wages paid to an employee for time that the employee is not providing services. If the company is not a large employer, qualified wages are the wages paid to any employee, whether they provided services or not.
Question: Are tips included in the calculation of qualified wages?
Answer: At this time, IRS guidance is unclear as to whether tips should be included in wages. GBQ will provide more information on this topic when guidance becomes available.
Other Considerations
Question: My restaurant currently claims the Work Opportunity Tax Credit (WOTC). If we claim the ERC, will that impact the calculation of the WOTC?
Answer: Yes. IRS guidance confirms that companies cannot “double dip.” The same wages cannot be used for both the ERC and the WOTC. Companies that currently claim the WOTC will want to inform their WOTC providers that they are planning to claim the ERC, so applicable qualified wages are not included in both credit calculations.
Question: My restaurant utilizes a PEO to report our payroll. Can we still claim the ERC?
Answer: Yes. A common law employer, if eligible to receive the ERC, is entitled to the ERC regardless of whether it uses a PEO. IRS guidance explains that if a PEO is claiming the ERC on behalf of a client employer, the PEO must collect from the client any information necessary to accurately claim the ERC on its client’s behalf. Restaurants that use a PEO should inquire about the process with their PEO to claim the ERC.
Question: What information are we still unsure about in regards to the ERC?
Answer: One of the biggest areas of uncertainty currently is the interaction of the ERC and Paycheck Protection Program (PPP) loan funds. When the ERC was revised under the Consolidated Appropriations Act, 2021, the provision restricting companies that received a PPP loan from claiming the ERC was removed. However, for those companies that have already applied for PPP loan forgiveness, questions now remain on how to claim the ERC, in particular when claiming the ERC retroactive to March 2020. We are also waiting on guidance on the new advance payment option of the ERC for 2021. This option allows employers to receive the ERC before qualified wages are paid.
Many taxpayers and practitioners are anxiously awaiting guidance and clarity on many aspects of the ERC. All of the information presented above is based on the guidance available as of February 3, 2021, and is subject to change. The IRS FAQs referenced above have not been updated for the changes made to the ERC under the Consolidated Appropriations Act, 2021. Further, the IRS FAQs cannot be relied upon as legal authority. However, restaurants can still review the ERC rules to determine eligibility. GBQ is continuing to monitor ERC developments and will provide more information when available.
Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services
Lorani Orobitg, CPA
Manager, Tax & Business Advisory Services
Material discussed in this article is meant to provide general information and time-sensitive developments related to federal payroll taxes. GBQ advises those who read this article to seek professional advice before taking any action based on the information presented. Any tax advice that may be contained in this communication is not intended or written to be used, and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable federal law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
