Major government programs like the Paycheck Protection Program (PPP) and the Restaurant Revitalization Fund (RRF) are no longer open for business. Yet one government program – the Employee Retention Credit (ERC) – is still available to restaurant owners who are looking to cash in on tens if not hundreds of thousands (or even millions) of dollars in tax refunds. This article will help you to meet the eligibility requirements and to claim the maximum allowable ERC for your business.
ERC – What is it?
The ERC is a fully refundable tax credit for employers impacted by COVID-19. Employers can receive up to $5,000 per employee in 2020 and up to $7,000 per employee for each of the first three calendar quarters in 2021.
To put this in simpler terms, the federal government is offering to reimburse restaurants up to $26,000 in wages paid per employee. If you’re doing some quick mental math, the credit can add up to hundreds of thousands (if not millions) of dollars in potential refunds for restaurateurs.
Am I Eligible for the Credit?
If you own a restaurant, most likely yes. The requirements are tailor-made for the restaurant industry.
There are two paths to eligibility – the business must have either:
- Been impacted by COVID-19 related orders from a governmental authority; or
- Experienced a significant decline in gross receipts compared to the same quarter in 2019.
Gross Receipts Test
For 2020, the rules are simple:
- Eligibility kicks in when there is a greater than 50% decline in gross receipts for any calendar quarter in 2020 compared to the same quarter in 2019; and
- You remain eligible through the quarter when gross receipts recover back to 80%.
For example, if your restaurant had gross receipts of $1 million for each quarter in 2019 you would qualify if the gross receipts in any quarter in 2020 fell below $500,000 and you would remain qualified through, and including, the quarter your gross receipts went above $800,000.
For 2021 the rules change slightly:
- You become eligible if you have a greater than 20% decline in gross receipts for any calendar quarter in 2021 compared to the same quarter in 2019; but
- You must test on a quarter-by-quarter basis; and
- If you don’t qualify for any quarter, you may use the prior quarter gross receipts test to qualify.
For example, let’s say your restaurant had $1 million in gross receipts for each quarter in 2019 and had gross receipts of $750,000 in Q1 2021 and $1 million in gross receipts for Q2 2021. You would qualify for Q1 2021, and even though you did not qualify based on the gross receipts in Q2 2021, you can still qualify for Q2 2021 by electing to use the previous quarter’s number (Q1 2021).
Note the ERC used to be available for Q4 2021, but recent legislation eliminated it.
Frequently Asked Questions on the Gross Receipts Test
Q1: Does PPP forgiveness count as gross receipts?
Q2: Do I use cash basis receipts or accrual basis receipts?
A2:You will use the same accounting method as the one you use for your restaurant’s tax return. If you file your return on a cash basis, then you will compare your cash receipts for the gross receipts test.
Q3: I own several restaurants – do I use separate or combined gross receipts?
A3:Restaurants in an aggregated group must combine gross receipts. If the group qualifies, each entity may claim the credit. However, if the aggregated gross receipts do not meet the requirements, none of the entities may claim the credit even though some restaurants individually had a significant decline in gross receipts.
Q4: I recently purchased a restaurant – how do I compare my gross receipts to 2019 if I didn’t own the business at that time?
A4:You may include the 2019 gross receipts of the acquired business even though you did not own the business during that 2019 calendar quarter.
Q5: I didn’t start my business until the middle of Q2 2019 – how do I compare my Q1 2020 gross receipts if I don’t have Q1 2019 gross receipts?
A5:If you started business in the middle of a quarter in 2019, you should estimate the gross receipts you would have had for the entire quarter. The first quarter the business was in operations in 2019 will be used as the base period (i.e., if your business started in Q3 2019 – compare Q3 2019 to Q1, Q2 & Q3 2020, or 2021).
Full or Partial Suspension of Business Operations
Even if your restaurant did not experience a significant decline in gross receipts, you may still be eligible for the ERC if your business was impacted by governmental orders. Some examples of these are:
- Suspension of indoor dining
- Seating capacity limits
- Curfews or limitations on hours of operations
To qualify, the order must have more than a “nominal effect” on your business. Some examples of governmental orders that do not qualify you to claim the ERC are:
- Mask mandates
- Requirements to set up physical barriers (sneeze guards or plastic barriers between booths)
- Suggested guidelines not mandated by a government authority
- Mandates that do not significantly impact operations (e.g., 10 pm curfew but the business closes at 9 pm).
The key language here is that the government order must have more than a nominal effect on your business operations – the IRS defines more than nominal as 10% or more.
The IRS allows business owners to look at this in two ways:
- 10% of your business in terms of 2019 gross receipts, or
- 10% of your business in terms of 2019 employee hours.
For example, let’s say your restaurant has dine-in and take-out options and the dine-in portion of your business accounted for 25% of sales in 2019. You would qualify for the ERC If you were mandated to close or significantly alter indoor dining. Even if your sales increased because you could continue to offer carry-out, drive-through, and delivery options, this does not negate the partial shutdown relating to in-room dining.
Frequently Asked Questions on the Full or Partial Suspension Test
Q1: If my business was partially suspended during the quarter does that qualify me to claim a credit on wages paid during the entire quarter?
A1:No, you can only include wages paid during the period of suspension. If the suspension period lasted two weeks, then only wages actually paid during that two-week period qualify for the credit.
Q2: I own several restaurants across the U.S. and some were impacted by governmental orders while others were not. How do I determine eligibility?
A2:Restaurants that are a part of an aggregated group must test on an aggregated basis. If 10% or more of the aggregated business was fully or partially suspended in terms of gross receipts or employee hours, then the entire group would qualify – including locations not under a government mandate.
Q3: My POS system doesn’t track indoor dining sales. How do I determine if indoor dining consisted of 10% or more of my gross receipts in 2019?
A3:Restaurant owners may use a reasonable method to determine if a portion of their business consisted of 10% or more of their operations. A creative way to estimate gross receipts would be to track the number of tables, the occupancy of those tables, and the average check per table. Another method would be to compare the hours of waiters/waitresses to determine if the total employee hours spent on indoor dining accounted for more than 10% of the total hours of all employees.
Q4: My restaurant was not under any government restrictions, but I decided to reduce capacity to protect my workers and my patrons anyway. Do I qualify?
A4:No, the full or partial suspension of operations must have been caused by a governmental order, which generally is an order from a government agency.
While every restaurant must test its eligibility for the ERC, our experience tells us that most will qualify. The ERC is designed to aid restaurants that experienced either a significant decline in gross receipts or a full or partial suspension of operations due to a governmental order. The nice aspect of the gross receipts test is that it is objective, and hard for the IRS to successfully challenge. The suspension-of-operations test may be subjective, but it appears to have been written with restaurants in mind. In our experience, most restaurants will qualify under this test in 2020 (and some in 2021) due to capacity restrictions, social distancing requirements, or limits on hours of operation.
If you think you may be eligible to claim the ERC, please reach out to your Withum advisor.