For restaurant owners seeking to obtain economic relief as a result of the coronavirus, the Employee Retention Tax Credit or ERTC should not be overlooked. While this credit has been available for some time, recent changes made by Congress now place this credit at the top of the list and could mean hundreds of thousands of dollars for some restaurant owners.
What is it?
The ERTC is a refundable payroll tax credit that can be taken against employment taxes equal to 50% of the qualified wages an employer paid to employees after March 12, 2020, and through December 31, 2020, for a total available credit of $5,000 per employee.
Updated March 16, 2021
What has changed?
- Congress voted to extend the ERTC until December 31, 2021
- The credit has been increased to 70% of the qualified wages paid to an employee rather than the previous 50%
- The maximum credit amount has also increased to $7,000 per employee per quarter of 2021 ($10,000 in qualified wages x 70%) for a possible $33,000 credit per employee. This is a significant increase from the previous annual cap of $5,000 per employee ($10,000 in qualified wages x 50%).
- Also, the full-time employees (FTE) threshold is up to 500 FTEs vs.100 in 2020
- The qualifying “significant reduction in gross receipts quarter-over-quarter” is now greater than 20% versus the prior greater than 50%
- Congress also included a provision that, when considering gross receipts for the first quarter of 2021, the employer can elect to compare Q4 of 2020 vs. Q4 of 2019 instead of Q1 of 2021 vs. Q1 of 2019 if there is a benefit to doing so.
How do I qualify?
Restaurants are required to meet one of the following criteria during any given calendar quarter:
- Your restaurant experienced a significant decline in gross receipts during the calendar quarter compared to the same quarter of 2019; or
- Your restaurant operations were either fully or partially suspended as a result of government orders. It should be noted that a full shutdown of operations is not required. The impact to your operations as a result of the shutdowns is required to be “more than nominal.”
Below are some restaurant-specific examples to help you to ensure you are not overlooking a potential credit:
Example: ABC Restaurant is required to close earlier than its normal closing time as a result of a curfew issued by the state government. For the ERTC, ABC Restaurant would meet the criteria of a partial shutdown for eligibility.
Example: ABC Restaurant is required to reduce the seating capacity within the indoor dining room to adhere to social distancing requirements mandated by a government order. In addition to the indoor dining room being open, ABC Restaurant is also offering delivery and carryout. If the modification that was required by the government mandates had a more than a nominal effect on your restaurant operations, it would be determined that ABC Restaurant would meet the criteria for a partial suspension of business operations.
My restaurant qualifies, now what?
Once an employer has determined they qualify under one of the stipulations above, the next step is to determine on which wages to calculate the credit. First, if a restaurant is fully or partially suspended, only wages paid during the period of suspension can be used in calculating the ERTC. If the restaurant qualifies based on the gross receipts test, the wages from each qualifying quarter can be used. The number of average monthly full-time employees (FTEs) significantly affects what wages can be used under either qualifying event. If the employer had less than or equal to 100 average monthly (FTEs) in 2019, then all wages paid to all employees during the eligible time period can give rise to a credit. If however, the employer had greater than 100 average monthly FTEs in 2019, only wages paid to employees during the eligible time period to NOT WORK are eligible for the credit. For purposes of this rule, an FTE is an employee who, for any calendar month in 2019, had an average of at least 30 hours of service per week or 130 for the month. It is important to remember that if you have more than 100 FTEs you will qualify as a “large employer” for 2021. This increased to 500 FTEs for 2021.
It is also important to consider the aggregation rules established by the IRS for determining whether entities need to be considered one single employer or separate entities.
Example: An individual owns 100% of 5 restaurant locations and each restaurant location is in its own separate entity. Even though each restaurant location is considered a single employer, the ERTC considers them all one employer when calculating the credit. Therefore, if you have one location that meets the criteria noted above all of your locations are eligible for the ERTC. Even if only one restaurant location was fully or partially suspended, you would consider all locations as fully or partially suspended.
Many restaurant owners will be navigating the rules and regulations of both the ERTC and Paycheck Protection Program (PPP). The Consolidated Appropriations Act, 2021, did revise the original restrictions allowing restaurants that have received PPP loan funds to now also claim the ERTC. It is important to segregate your payroll costs between those costs you are obtaining PPP loan forgiveness on and those payroll costs to be used to calculate the ERTC. Also, if your restaurant takes advantage of the Work Opportunity Credits, the wages used for the WOTC are also not permitted to be used in calculating the ERTC.
As can be expected, the various allocations and calculation scenarios are far too comprehensive to include in the overview of this blog. When considering the ERTC for your restaurant, do not hesitate to reach out to your tax advisor. William Vaughan Company has a team of professionals that are available to assist your restaurant should you need to make sure you are maximizing all of your benefits. For Restaurant365 customers, once the credit amounts are determined and your tax advisor has confirmed your eligibility, Restaurant365 Payroll can file your 941 and/or 7200 so that you may receive these credits.
Kristin Metzger, CPA, is the restaurant practice leader at William Vaughan Company, a full-service accounting and advisory firm. In addition to her leadership role, she also collaborates with the firm’s outsourced accounting affiliate, WVC RubixCloud. As part of that team, Kristin has been helping restaurant owners and operators gain a clear and accurate financial picture by streamlining the day-to-day accounting functions through hands-on expertise and advanced technology.
William Vaughan Company is a certified accounting partners of Restaurant365, an all-in-one accounting, operations, inventory, scheduling, payroll and HR solution exclusively for restaurants. Schedule a demo today.