Millions of organizations across the U.S. have filed for the Employee Retention Credit (ERC) to financially recover from restrictions to their business operations caused by COVID-19. The Internal Revenue Service (IRS) continues to receive a record number of ERC claims, also referred to as the Employee Retention Tax Credit (ERTC), based on recent data for Form 941-X filings. Despite this popularity across numerous industries, some businesses have yet to fully take advantage, including restaurants. This lost opportunity for financial recovery is multiplied when it comes to claiming the ERC for restaurants part of a franchise.
There are several misconceptions causing restaurants to hesitate despite a path to eligibility which will be explored in this article.
ERC for Financial Recovery
The ERC was created by the CARES Act to financially support employers who kept employees on payroll despite local, state and/or federal restrictions to their operations related to COVID-19. This relief measure acts as a payroll tax credit for businesses based on a percentage of qualified wages paid to employees. The exact amount of credit available is based on the number of employees.
In 2020, the statute defined “large employer” as an employer who averaged more than 100 full-time employees during 2019. In 2021, large employers are classified as averaging more than 500 full-time employees during 2019. Qualified wages for large eligible employers are limited to wages paid to employees when not providing services. Qualified wages for small eligible employers includes all taxable wages.
To qualify, an employer must prove a partial suspension of their normal operations because of a government order. Concerning the ERC for restaurants, this could include, but is not limited to, the additional costs to comply with health and safety requirements, restrictions to capacity, or a measurable loss of profit.
ERC for Restaurants: Common Misconceptions about Eligibility
There are several common misconceptions among restaurants and other businesses which operated in some capacity during COVID-19 restrictions.
For restaurants in the fast-food business, revenue in some cases grew during the pandemic because of an increase in take-out orders. Uber Eats reported a 152 percent increase in revenue for 2020 compared with the previous year. If revenue did not drop, an employer may assume they don’t qualify for ERC. However, there is no restriction to ERC eligibility under the partial suspension test based on revenue.
Another misconception is related to designation as an essential business. Some employers, including restaurants, were allowed to continue operating during the pandemic because they were deemed an essential business and employees could continue working. As mentioned previously, there are several qualifying scenarios for the ERC. Paying employees who continued working does not disqualify small employers.
An additional misconception we encounter a lot is the belief that an employer does not qualify if they were not fully shutdown. However, there are many paths to qualify based on a restriction to normal operations. This does not require a full shut-down or suspension.
Finally, and perhaps the most common misconception, is the notion that an employer does not qualify for the ERC if they claimed a Paycheck Protection Program loan. This was initially true, but has since changed.
For these reasons, many restaurants and restaurant franchise owners may have been misinformed that they do not qualify for the ERC.
Qualifying for the ERC as a Restaurant
The second eligibility test of the ERC program looks to whether your business was fully or partially suspended due to state, local or federal orders. However, this does not necessarily mean what you think it means.
Being deemed as an ‘essential business’ or experiencing revenue growth in 2020 or 2021 does not mean you do not qualify for the ERC.
Depending on the type of establishment you own, from a sit-down fine dining restaurant to a local Starbucks, did you move to take-out only? Did you only have your drive-thru open?
Was your dining room closed? Within your dining or seating areas, did you experience capacity restrictions such as 25%, 50%, or 75% capacity? Were any other portions of your operations fully or partially suspended for any period?
Again, being essential and remaining open does not mean you weren’t shut down.
The key is being aware of every single local, state and federal government mandate, and accurately calculating the impact on your operations.
Claiming the ERC for Multiple Restaurant Franchises
These qualifying scenarios can be replicated across multiple restaurant franchises where the same situations apply. However, local and state mandates can be unique which is why it is essential to accurately calculate the credit. This greatly increases the time and expertise required to claim the ERC for restaurants in a franchise, but the multiplied financial benefit should outweigh any concerns about additional work. Partnering with tax experts at Experian Employer Services can greatly reduce the burden, allowing franchise owners to fully realize the benefit of the credit for all their locations.
However, it is important to note common ownership across multiple units grows the employee count, which changes the rules and the amount of credit that can be claimed for payroll. This is another reason to work with tax professionals who understand the way aggregation rules work.