Originally included in the CARES Act passed in March of 2020, the Employee Retention Credit (ERC) provided a mechanism to reimburse adversely impacted employers for wages paid to employees who remained employed during the pandemic. The program was subsequently expanded via the Consolidated Appropriations Act and American Rescue Plan Act. Very broadly, the maximum payroll tax credit is $5,000 per employee for the calendar year 2020 and $7,000 per employee per quarter for the calendar year 2021.
After navigating through the complex rules, many restaurants have ruled out the possibility of obtaining the credit due to their initial understanding of the rules. However, we have found numerous ways for restaurants to qualify for the ERC by taking a deeper dive into the rules as demonstrated below and success stories we have seen in the restaurant space:
No Necessity Based Requirement or Limitation on Funding
Unlike other relief programs (i.e. PPP Loans), there is no need-based requirement that must be demonstrated to claim the ERC; the company must only demonstrate it had a specified revenue decline or was impacted by a partial or complete shutdown due to governmental order. Additionally, there is no limitation on funding available for the credit nor tight deadlines to file for the credit. If you still have not considered or filed to claim the credit, there is still time. A franchisor operating multiple units is estimated to secure over $1,000,000 of credits for 2020 alone after they were assured there was no need-based requirement.
Computing Full-Time Employees
For the 2020 ERC, an employer must have 100 or fewer full-time employees based on the 2019 employee count to qualify for the full benefit of the credit and 500 or less for 2021 (Note: you can claim the credit if you are above these employee counts but the potential benefit is significantly reduced). The count for full-time employees only considers those working 30 hours or more in a week (or 130 hours in the month) and there is no full-time equivalency count. Within the restaurant industry, we are seeing an overstatement of the employee count due to the inclusion of many part-time employees. Consider revisiting your full-time employee count to see if you can qualify for the full benefit of the credit. A small franchisee of QSR restaurants is estimated to secure over $500,000 in credits for 2020 alone after revisiting their full-time employee count, after initially believing they had over 100 employees.
How To Qualify For The Credit Under A Partial Shutdown
Some restaurants had certain business segments or locations that performed well during the pandemic while others did not. Many of these restaurants initially believed they could not qualify for the credit, but the requirement to either shut down or socially distance indoor dining rooms has still allowed some restaurants to qualify for the credit under the partial shutdown test. If your pre-pandemic dine-in revenues were more than a nominal part of your total revenues, you may still qualify for the credit. A single unit concept was able to secure $300,000 of credits despite not having a significant revenue decline overall but was partially impacted by government orders during the year.
If a restaurant does not meet the partial or complete shutdown test, the restaurant must have a 50% gross receipts decline relative to the same calendar quarter in 2019 to qualify for the credit in 2020 and a 20% gross receipts decline relative to the same calendar quarter in 2019 to qualify for the credit in 2021. However, the gross receipts decline is calculated on the method used to report gross receipts on your federal income tax return (i.e. cash basis when accrual is used for financial statement purposes). Additionally, gross receipts include items not typically considered gross receipts for financial statement purposes (i.e. interest income or gain on the sale of certain assets). Ensure you are computing the gross receipts decline on the proper method of accounting and that you are including all items in gross receipts as prescribed by the tax law.
Article written by:
Ryan Kilpatrick, CPA
Senior Manager, Tax & Business Advisory Services