Why Almost All Restaurants Qualify for the Employee Retention Credit (ERC) Tax Refund

Why Almost All Restaurants Qualify for the Employee Retention Credit (ERC) Tax Refund | Restaurant Employee Retention Credit

The Employee Retention Credit was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist small and midsize businesses like restaurants and hotels in continuing payroll throughout the epidemic. The goal was to encourage employers' staff retention and avert layoffs. Many amendments and changes have been made to the ERC since 2020.

Contrary to what you are probably being told, your restaurant DID NOT have to be fully shut down to qualify. It could have been only partially shut down. Your Accounting, Tax, or Financial Professional may have told you your restaurant does not qualify. They are completely wrong and do not fully understand the current ERTC guidelines.

Restaurants meeting the ERC guidelines can get a tax refund equal to a certain percentage of their qualified wages. This is for restaurants that either had services or gatherings restricted because of government orders or experienced a decline in gross receipts.

Although the Employee Retention Tax Credit program has ended, restaurants may still be able to claim the credit for eligible quarters within three years of the program's sunset date. This includes employers who received a Paycheck Protection Program (PPP) loan.

According to the IRS ERC rules, one way to qualify for this tax credit is to qualify due to restrictions imposed on the restaurant's location by either a state or local governments during the pandemic. From the government-mandated start date of restaurant capacity restrictions to the end date when those restrictions were fully lifted, your restaurant qualifies for the ERC Credit and tax refund.

Check out the current listing of Shut Down Orders Broken Down by State.

Key ERC Credit Takeaways You Will Learn:

ERC for Restaurants: Learn the specifics of Employee Retention Credit for Restaurants.
Calculating ERC: Discover how to calculate Employee Retention Credit for your restaurant.
Avoiding Claim Mistakes: Understand the common mistakes to avoid during the ERC claim process.

What is the Employee Retention Credit for Restaurants?

In 2020, the Employee Retention Credit (ERC) allowed qualifying restaurants, bars, cafes, and other food service businesses to receive a credit on gross wages and some employment taxes by claiming a refundable tax credit equal to 50% of the maximum qualified gross wages of $10,000 paid between March 12, 2020, and December 31, 2020.

For 2021, a refundable tax credit equal to 70% of qualified gross wages up to a maximum of $10,000 per quarter paid between January 1, 2021, and September 30, 2021, for businesses already in existence before February 15, 2020. Restaurants started or purchased after February 15, 2020 (also known as a Recovery Startup in IRS ERC terms) can claim employee wages through December 31, 2021.

How Does the Employee Retention Credit Work For Restaurants?

Since the eligibility requirements and amount of credits awarded have changed multiple times since the ERC program was launched, it can be tricky for restaurant owners to determine if they qualify and how much they are entitled to receive

Pro Tip: The key to receiving the maximum benefit from this tax credit is understanding how to qualify the eligible quarters safely and then which employees, wages, and payments qualify for the credit.

To claim the Employee Retention Tax Credit, employers must determine their eligibility and estimate the credit amount for each pay period. They would then deduct this amount from their payroll tax deposit and report the credit on IRS Form 941-X. The 941-X is amending the original Employer's Quarterly Federal Tax Return (Form 941) payroll, typically due within 30 days of the end of the quarter.

The credit claim process may differ for quarters ending on or after September 30, 2021. Employers will need to confirm the details of their specific situation.

To receive the tax credit, restaurant owners must document and prove that their business was negatively affected by the pandemic, either through revenue or capacity restrictions. They must also prove that they paid their employees during these times. Owners must keep accurate records of all employee payrolls, including pay periods and qualified wages.

Is My Restaurant Eligible for the Employee Retention Credit? Eligibility Requirements For Restaurants

Yes! Restaurants can claim the employee retention credit in one of two ways.

The first way a restaurant can qualify is if it experienced a full or partial shutdown due to COVID-19 government regulations or any other government-mandated shutdown of operations during specific periods in 2020 or 2021 due to the pandemic.

The second way a restaurant can qualify for the ERC is if it has experienced a significant decline in gross receipts compared to one of two prior years (2019 versus 2020 or 2021). A reduction in gross receipts is significant when the decline is more than 50% in 2020 compared to the same quarter in 2019 or 20% in 2021 compared to the same quarter in 2019. In straightforward terms, you have to reach the same quarters of 2020 and 2021 as 2019.

For example, if a restaurant had gross receipts of $100,000 in the 2nd quarter of 2019 and $49,999 in the same quarter in 2020, it would meet the criteria for a significant decline in gross receipts. Similarly, for 2021, if your restaurant had gross receipts of $79,999 in the same quarter, it would meet the criteria for a significant decline.

Internal Revenue Service provides the conditions to help restaurants qualify for the Employee Retention Credit.

They are as follows:

1. Social Distancing Through Capacity Restrictions at Your Restaurant or Hotel's Location

You might be eligible for the Employee Retention Credit if you were forced to reduce your restaurant seating capacity due to social distancing requirements from the COVID-19 pandemic.

2. Your Restaurant Dining Is Closed Indoors, But Open Outdoors or for Delivery

If your restaurant was only open for outdoor dining or pickup/delivery, and you could not operate indoors due to restrictions imposed by your local government. In that case, you may qualify for the Employee Retention Credit because your operations were affected by COVID-19.

3. Your Restaurant Is Closed to Dine-in Customers but Open for Takeout or Delivery

If your restaurant is only open for takeout or delivery and you cannot operate dine-in due to restrictions imposed by your local government.

How to Calculate the Employee Retention Credit For Restaurants?

You cannot calculate the credit amount correctly without calculating the total gross wages paid in a quarter. So it's essential to understand how to calculate restaurant employee retention credit.

The restaurants that qualify for the employee retention credit can consider three types of compensation: paid wages, FICA-tax compensation, and certain qualified health expenses. To be valid, these qualifying wages must have been paid to employees still working for the company between March 12, 2020, and September 30, 2021.

Note: An important thing to remember when determining qualifying wages is that PPP loan-funded wage expenses cannot be included. Using PPP loans on non-wage expenses or wages that wouldn't produce employee retention credits would be more beneficial.

Here's what government would pay for 2020 and 2021:

In 2020, the creditable wage per employee was up to 50% for the first $10,000 of qualified wages for the entire 2020 year. This change could mean an ERC refund of up to $5000 per employee in 2020. The refund deducts up to $5000 in total payroll costs per employee.
2021 is more lucrative for the ERC credit. The IRS will pay 70% of an employee's first $10,000 in qualified wages per quarter per employee. This change could mean an ERC refund of up to $7000 per employee per quarter in 2021. The refund deducts up to $7000 in payroll costs per quarter per employee.
That means total payroll costs could drop to $26,000 per employee for 2020 and 2021 combined.

How Can Restaurants Claim the Employee Retention Credit?

The IRS has set up various ways for eligible restaurants to claim the ERTC. The most common option is to file Form 941-X for each quarter for which you're eligible. This form must be filed and mailed to the IRS in paper format. It cannot be filed electronically.

Note: Restaurants that received Round 1 or Round 2 of SBA PPP loan funds should speak to an ERC Tax Refund Consultant about how these need to be correctly deducted per IRS guidelines to maximize their employee retention credit tax refund benefits.

Case Study of the Employee Retention Credit in Action

You might think the ERC is impossible or too complex, but don't worry. Many restaurants have already benefited from the tax credit with Legacy Tax & Resolution Services expert specialized help.

Here is an ERC Restaurant Example:

This is an example of what's at stake and how much money is on the table with restaurants if they choose not to participate in the ERTC. There is no reason not to participate. If you qualify, you are owed and deserve these tax refund monies. Almost all restaurant-related businesses will qualify based on what this ERC guide shares.

A restaurant made $2.3 million in total sales for 2020 and $3.6 million in total sales for 2021, both years down from the pre-COVID year of 2019, where they grossed $4.7 million in total sales and revenue.

In 2020 and 2021, the restaurant received two Paycheck Protection Program (PPP) loans totaling over $900,000 that the SBA had forgiven.

The great news is that the rules have changed. Prior IRS rulings disqualified the business from claiming the ERC credit due to PPP forgiveness. With current ERC rules, restaurants that did receive PPP loans still may qualify, as long as the PPP loan forgiven amount used to pay payroll is not also used for the qualifying wages calculation for ERC.

From late March 2020, not due to a mandated closure, however, due to mandated capacity restrictions on indoor dining that lasted well into mid-June 2021, they were eligible to receive an Employee Retention Credit Refund totaling $285,925!

This breaks down to $115,360 in 2020 and an additional $170,565 in 2021. That's $285,925 in ERC credits, an actual tax refund check received from the IRS. And this was after correctly subtracting over $900,000 in PPP loans and removing majority owners and family members.

That's a lot of money your restaurant could have missed out on without seeking expert help to understand how your restaurant or resturants may qualify for ERTC fully.

In this case, the Certified Public Accountant (CPA) told them they did not qualify for the ERC. The CPA was wrong! Their accountant did not take the time to fully educate themselves on the confusing and complex Employee Retention Credit program for themselves and their business clients.

Carefully examine the details of the ERC, consulting with ERC tax professionals and understanding how it interacts with other programs, such as the PPP, RR, and SVOG, to get the most out of this tax credit.

Doing so can help your restaurant thrive for years with much-needed tax refund relief.

6 Tips For Restaurant Owners on Maximizing the Benefits of the Employee Retention Credit

Here are some tips and ideas for maximizing the benefits of the ERC:

1. Keep Detailed Records of Employee Wages and Other Eligible Expenses

Restaurant owners need to keep detailed records of employee wages and other eligible expenses to ensure that they can take advantage of the Employee Retention Credit. This includes keeping track of the total wages paid to each employee and any other eligible expenses, such as health insurance premiums or retirement plan contributions.

Having accurate and up-to-date records will make it easier for restaurant owners to calculate the credit and claim it on their tax returns.

2. Check the Eligible Wage Date Ranges

Comprehending the dates used to decide if your employee's pay rate qualifies for ERTC funds is crucial. The qualifying dates under the CARES Act are March 13, 2020, through December 31, 2021 (for Recovery Startup Restaurants) and through September 30, 2021, for most others.

If restaurant owners have employee wages before or after the qualifying eligibility dates, their wages will not qualify for ERTC funds.

3. Find Out if You're Eligible

Check your overall eligibility, such as full or partial shutdowns/capacity restrictions on indoor dining or your gross receipts, to ensure you meet the ERTC requirements.

A "significant" decline in gross receipts is required for this, meaning that at least -50% of the gross receipts in 2020 have declined compared to the same quarter last year (2019), or at least -20% of the gross receipts in 2021 have declined vs. 2019.

4. Understand What Is a Qualified Wage

Wages that qualify for the deduction are not limited to gross pay. They include what you pay full-time and part-time employees and any health plan costs you cover on their behalf, as long as there were 500 employees or less paid in a quarter during 2020 and 2021.

It combines what the employer contributes and the employee pays before taxes come out. Any after-tax contributions your employee makes to their health care don't count towards this total.

5. Learn How to Calculate the ERC

All the rule changes over the last several years can be confusing. The basics are multiplying the qualified wages (up to $10,000) for each employee in 2020 by 50%. In 2021, qualified wages (up to $10,000) per quarter per employee multiplied by 70%.

Overall, you calculate your total ERC credit refund for both years differently. This calculation can differ based on other factors, so it's a good idea to consult a professional ERC expert.

6. ERC Affiliation Rules

The ERC has different rules for affiliation than the PPP. For example, the ERC relies on the controlled group concept from the IRS when determining employee and gross receipts reductions. This means that, for businesses with an affiliated business, the two entities must be treated as one taxpayer for purposes of the ERC. Companies need to take into account the requirements for what would make an employer eligible under IRS code Sections 52(a), 414(m), or 414(o).

7 Common Mistakes to Avoid With the ERC Claim Process For Restaurants

1. Guessing How Much ERC Credit You Qualify For

The IRS does not work in guesstimates. They work in exact numbers related to your restaurant, which need to be figured by the book.

Up to $26,000 per qualifying employee would entice anyone to multiply that number by the number of employees they have and dream about a big fat check. However, similar to most things associated with the IRS, it's far more complex than simple math.

Numerous factors determine how much tax credit your business could receive. Therefore, it's vital to seek expert help to accurately calculate your potential credit amount before filing your claim with the IRS. The ERC is not an application; it is claimed based on your qualifications and numbers.

2. Thinking You Do Not Qualify or Disqualifying Your Business Before Getting the Consultation of an ERC Tax Specialist

The CARES Act is a complex piece of legislation, and the eligibility requirements for ERC are even more complicated. Many restaurant owners may get confused and automatically disqualify themselves before consulting a tax specialist.

It would be best to speak with an ERC tax refund specialist and have a deep-dive analysis performed for your restaurant business or restaurant group to determine your eligibility fully.

3. Failing to Document Your ERC Claim Properly

Proper documentation is critical to the success of your ERC application. This includes receipts, invoices, and payroll documents. Ensure you have detailed records of employee wages, health care costs, and all other relevant expenses. Also, keep a record of your ERC documents for future reference.

Furthermore, the state or local government orders that your restaurant be shut down, have indoor dining closed, or limited capacity until all capacity restrictions are lifted.

This video will show if all restaurants qualify for the employee retention credit tax refund.

4. Claiming Unqualified Wages on Quarters That Do Not Qualify

Since it's a refundable credit, it would be best to ensure you claim all the correct wages and health care costs. There is a high chance you may miss out on things because of several changes this program has been through. You can only claim wages from quarters that are safely qualifying.

5. My Restaurant Remained Open Throughout the Pandemic; I Don't Qualify?

Do you know that even partial shutdowns are eligible for the ERC? Wrong! Restaurants that remained open but significantly decreased gross receipts compared to 2019 may still qualify for the ERC. It all depends on how much of a decrease in gross receipts you experienced compared to 2019.

Also, almost every restaurant in the United States was forced to close their dining rooms and indoor dining for periods and then were forced to limit customers in their indoor seating areas by 25%, 50%, or even 75%. Others were forced to restrict their hours of operation.

These are all fair game and eligible scenarios that make your restaurant qualify for the periods that state, county, city, municipality, or local governments mandated these restrictions on your business, regardless if you even made more money during 2020 and 2021.

7. Failing to Seek Expert Guidance from a Knowledgeable ERC Specialist in Accounting, Tax Advisory, and ERTC Tax Credits

Many so-called ERC experts and ERC specialists have seemingly popped up in the past year. Just Google "Employee Retention Credit," and many websites claiming to be an ERC expert in tax credits litter Google Search Results.

Legacy Tax & Resolution Services (LTRS) has assisted over 1500+ business owners with the various SBA programs and over 400+ businesses nationwide with the Employee Retention Credit. Everything Legacy Tax & Resolution Services does to qualify restaurants and other companies and run the complete ERC calculations is done by the book and with current IRS rules and regulations for the ERC program.

LTRS visually walks the restaurant owner or principals through how quarters were qualified, how the payroll calculations were performed, how any PPP loans were subtracted out correctly, and removing any majority owner wages and family members or relatives of majority owners.

With LTRS, business clients can be assured their ERC refund has been maximized, qualified, and calculated exactly how the IRS designed the ERTC program. Step-by-step and by the book to stay safe and compliant with all IRS regulations for the ERC.

Schedule a free ERC consultation to review your restaurant business ERTC tax credit in detail.

Restaurant ERC Frequently Asked Questions:

Restaurants Qualify: Get Help on How to Apply for the Employee Retention Tax Credit (ERC / ERTC): Claim Up To a $26,000 Refund Per Employee for Your Restaurant.

Legacy Tax & Resolution Services can assist your restaurant with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) programs without you having to sacrifice an excessive percentage of your hard-earned ERC refund.

Depending on eligibility, restaurant owners can receive up to $26,000 per employee based on the number of W2 employees on the payroll in 2020 and 2021.

The ERC / ERTC Program is a valuable IRS tax credit you can claim for your restaurant business.

Schedule Your Free Employee Retention Credit Consultation to see what amount $ your restuarant qualifies for.

Deadline for 2020: April 15, 2024