In March 2020, Congress enacted the Employee Retention Credit (ERC) as part of the CARES Act to incentivize companies to keep employees on their payroll. The beneficial ERC is a refundable tax credit claimed against an employer’s share of social security taxes on its quarterly payroll tax filings for each quarter eligible.
When the credit was enacted, however, there was one provision that prohibited many companies from being able to qualify for the credit – those that received Paycheck Protection Program (PPP) loans were ineligible. That group included restaurants. Many facing mandatory government shutdowns and economic struggles chose to apply for a PPP loan.
Good News for Restaurants
Now, as a result of the recently passed Consolidated Appropriations Act, 2021 (CAA, 2021), the PPP loan restriction was removed. Restaurants that received PPP loans are now also eligible to claim the ERC. This change was made retroactive to the enactment date of the CARES Act in March 2020. Restaurants are a likely beneficiary of this change and the impact may be significant.
How Restaurants Can Qualify for 2020
For a restaurant to qualify for the ERC in 2020, it must still meet one of the following criteria:
- Operations were fully or partially suspended during any calendar quarter in 2020 due to a government order; or
- Experienced a decline in gross receipts of more than 50% for any calendar quarter in 2020 compared to the same calendar quarter in 2019.
IRS guidance on the ERC contains several examples related to restaurants, in particular, on when restaurants are considered to be fully or partially suspended by government order. Examples include:
- A restaurant business that must close its restaurant to on-site dining due to a government order, but continues to service customers on a carry-out, drive-through, or delivery basis is considered to be partially suspended due to government order. This would also include capacity constraints placed on a restaurant to meet social distancing compliance requirements, as long as those constraints have more than a nominal effect on the restaurant’s business operations.
- IRS guidance also explains that an employer’s operations are considered to be partially suspended for purposes of the ERC if the employer is required to reduce its operating hours by governmental order. This provision is applicable to restaurants, as in Ohio, for example, restaurants and bars are currently under curfew and are required to close by a certain time each evening as a result of a government order.
If an eligible restaurant meets one of the two qualifications mentioned above, it must then determine if it paid qualified wages. Qualified wages include wages and health plan expenses paid to all employees, whether they provided services or not during their qualified calendar quarter unless the employer is a large employer.
The large employer exception for 2020 states:
- For restaurants with 100 or fewer full-time employees, qualified wages include wages and health plan expenses paid to all employees, whether they provided services or not.
- For employers with more than 100 full-time employees, qualified wages only include wages and health plan expenses paid to employees who were not providing services.
For example, if restaurant employees were furloughed for two weeks, but the restaurant continued to pay those individuals’ wages or health plan expenses during those two weeks, then those expenses would be considered qualified wages for the ERC if you were above the 100-employee threshold.
Specific to the employee count the large employer threshold is based on the average number of full-time employees a restaurant employed in 2019. IRS guidance defines a full-time employee as 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. This full-time employee count is measured at the legal entity level for which payroll is paid. However, under the ERC’s aggregation rules, all entities that are members of a controlled group of corporations or a group of entities under common control are considered a single employer for purposes of determining the employer’s average number of full-time employees. It’s essential, then, for restaurants to determine which employees meet the full-time employee definition and which ones do not, given restaurants tend to employ many part-time workers.
ERC Interaction with PPP Loan and WOTC
For restaurants that received a PPP loan, it is important to note that wages paid with forgiven PPP loan funds cannot be used in the calculation of the ERC. This prevents companies from “double-dipping” on the same wages for both the PPP loan program and the ERC. Therefore, restaurants that received a PPP loan must review their 2020 payroll costs to determine if there are wages remaining – not paid with PPP loan funds – that can be used to claim the ERC retroactively. The same will hold true for 2021 if they are considering both the ERC and a second PPP loan. It may be a strategic decision as to what to submit for forgiveness expenses – payroll only vs. payroll at 60% + eligible non-payroll expenses.
Another interaction to consider is the ERC and the Work Opportunity Tax Credit (WOTC). Many restaurants calculate and claim the WOTC on their federal income tax returns when they hire individuals from certain target groups. For 2020 and 2021, those restaurants will need to ensure that they are calculating the credits correctly, as again, there can be no “double-dipping.” The same wages cannot be used for both credits. To reiterate, restaurant owners should strategically review this, as the ERC credit is refundable now against payroll taxes while the WOTC is a non-refundable income tax credit against federal income taxes. With most restaurants closed or not fully operational and running losses, the payroll tax credit (ERC) may make the most sense versus a federal income tax credit (WOTC).
2021 ERC Extension and Enhancements
With the recent enactment of the CAA, 2021 the ERC was significantly expanded. Below is a summary of those changes for 2021.
- Extended until June 30, 2021.
- Decline in gross receipts test to qualify for the credit was reduced from 50% to 20%. That means for Q1 2021 and Q2 2021, restaurants that experience a decline in gross receipts of more than 20% compared to the same quarter in 2019 will be eligible.
- Increase from 100 to 500 in the number of full-time employees that it takes to be considered a large employer.
- The maximum credit that an employer can claim per employee will be $7,000 per quarter versus the previous amount of $5,000 for the entire year.
Note, the ERC’s aggregation rules must, again, be considered for determining when an employer’s business is fully or partially suspended due to a government order and for determining when an employer is considered to have a significant decline in receipts.
Food for Thought
In 2020, many restaurants did not consider the ERC because PPP loan recipients were ineligible for it. Now, with the change in eligibility requirements, the ERC may provide restaurants with an opportunity to conserve cash and help keep their businesses running. To claim the ERC retroactively for 2020, the CAA, 2021 provides that an employer may elect to treat Q1 through Q3 2020 qualified wages as being paid in Q4 2020. For 2021, the updated law allows small employers to file for an advance payment of the ERC up to a certain amount. We are currently awaiting more guidance from the IRS on these filing procedures. Contact your GBQ advisor for more information on the ERC and how to claim this valuable payroll tax credit.
Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services