2020 was an exceptionally hard year for restaurants. It was filled with quarantines, mandates, and the fear of the unknown. 2021 was supposed to be the “Year of Recovery” but ended with two new COVID variants that put pressure on every industry, especially hospitality. The employee retention credit (ERC), also known as the employee retention tax credit (ERTC), was created in March 2020 to encourage eligible businesses to keep employees on payroll to aid organizations through the pandemic.
Originally created by Congress as an alternative COVID stimulus program to the more popular and well-known Paycheck Protection Program, the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021; and 70% of qualified wages paid between January 1, 2021, and October 31, 2021. During this period, eligible employers could get immediate access to the credit by reducing employment tax deposits they are otherwise required to make, but delayed guidance from the IRS and the significant complexity of the ERC made this option unavailable for many restaurant groups. Fortunately, the law allows the ERC to be claimed up to three years after the wages were paid, yet many businesses are either unaware of the ERC or have not yet taken advantage of this important program.
A Brief Timeline Of The ERC
The COVID-19 pandemic brought forth a lot of changes for tax incentives and credits. The ERC was no exception and saw a lot of change from its inception in March 2020 and its early expiration in October 2021. Below is a brief timeline of its lifecycle.
March 2020: The CARES Act unveiled the ERC, but businesses had to choose between claiming the ERC or taking a forgivable PPP loan.
December 2020: Congress then made significant changes to the ERC and PPP, enabling companies who received a PPP loan to also claim the ERC retroactively, and both extending the ERC into 2021 and making the credit more generous.
March 2021: Congress passed the third major COVID-19 relief bill with the “American Rescue Plan” (ARP). The ARP made changes to the ERC, which extended the credit for the third and fourth quarters of 2021; and established the “Recovery Startup Business” credit (RSB).
November 2021: Congress passed the infrastructure bill which eliminated the ERC for the fourth quarter in 2021 but allowed eligible employers to still claim the RSB for the fourth quarter.
The ERC, A Lifeline To Restaurants
For most of 2020, the Paycheck Protection Program was the primary stimulus lifeline available for the restaurant industry, and because the CARES Act did not allow a business that had received a PPP loan to also claim the ERC, this program didn’t receive much attention. However, with the law change to open up the ERC to all eligible businesses, and with the changes made to the ERC in 2021, this has now become the most important funding opportunity to help restaurants recover and rebuild from the pandemic.
In order for restaurants to be considered eligible for the ERC, they must satisfy at least one of two conditions:
- Operations were interrupted and/or suspended due to a “government mandate” related to the COVID-19 pandemic
- Your restaurant experienced a decline in revenue due to the COVID-19 pandemic that resulted in a significant decline in gross receipts when compared with the same quarter of 2019
The IRS issued favorable guidance in Notice 2021-20 which clarified that any governmental order that imposed occupancy restrictions on restaurants, either by prohibiting indoor dining or enforcing capacity restrictions in the dining room, is a qualifying “government mandate” that creates eligibility for the ERC. Accordingly, any restaurant that offers indoor dining and was subject to government-ordered capacity restrictions should qualify for the ERC for the time period that the order was in place.
For restaurant companies that operate restaurants in multiple states, Notice 2021-20 also clarified that as long as one restaurant is subject to a government-mandated capacity restriction, all restaurants operated by the restaurant group will qualify, even if some of the related restaurants are in locations that do not have mandated operating restrictions in place.
As the country returned to “normal” operations and capacity restrictions were lifted, your restaurant could still be eligible for the ERC if your sales declined at least 20% in 2021 vs. the same quarter in 2019.
Finally, the ERC is significantly more generous for 2021 than 2020, so careful analysis of eligibility for 2021 can potentially reap big rewards.
Don’t Worry There Is Still Time
If you are just learning about the ERC, don’t worry you still have until mid-2023 for the 2020 credits, and into 2024 for the 2021 credits.
There are a lot of moving pieces, so unless you are a tax expert, you need a professional to help you. Due to the complexity around Notice 2021-49 and the inclusion of tips, you need a tax advisor that deals specifically with restaurant groups. The IRS is training auditors every day to assess ERC clients to look for issues. It’s so important to make sure that your ERC is filed correctly, otherwise it could make your restaurant group vulnerable to an audit. No one needs that in their lives after the past few years. Get it done right the first time.
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About The Author
Myra Noshahi, CPA is the Tax Manager at Tablespoon, the leading restaurant industry focused Sage Intacct partner that provides managed accounting services, as well as tax and financial consulting services. Myra answers tax planning questions, helps our clients apply for government programs with the IRS and SBA, prepares tax returns, and manages our tax client relationships.
Prior to Tablespoon, Myra was a Tax Manager at PwC. She studied Accounting at Southern Methodist University (SMU) and obtained her CPA shortly after. Myra is located in Dallas, TX and loves to visit new restaurants in her spare time. “I’ve always been interested in restaurant operations, so Tablespoon is the perfect fit to blend my professional and personal passions together,” says Myra Noshahi.