Did you know a new law signed in December might mean your operation is eligible for an employee retention tax credit?
There are considerations to evaluate, but eligible restaurants can access employee retention tax credits for 2020 and 2021 for eligible employee wages—if they didn't pay specific payroll wages and/or group benefits with PPP loan funds.
Restaurants won a key breakthrough in year-end legislation when lawmakers expanded employee retention tax credit (ERTC) eligibility. Many small businesses who were previously ineligible may now be eligible for up to $19,000 in ERTC per employee.
Under the CARES Act, passed in March 2020, a restaurant’s use of a Paycheck Protection Program loan restricted any subsequent eligibility for the ERTC.
This was all changed on December 27, 2020, when the Taxpayer Certainty and Disaster Tax Relief Act passed. Now, for any calendar quarter between March 13 and Dec. 31, 2020, a restaurant with 100 or fewer full-time employees may be able to access ERTC of up to $5,000 per employee.
And, for the first two quarters of 2021, Jan. 1–March 31, and April1–June 30, restaurants with 500 or fewer full-time employees may be able to access ERTC of up to $7,000 per employee per quarter.
While there are many considerations to evaluate, eligible restaurants can now access employee retention tax credits for both 2020 and 2021 for eligible employee wages as long as they did not pay specific payroll wages and/or group benefits with PPP loan funds. Here are two examples to explain how a restaurant might claim the credit:
Example 1: Henry’s Hotcakes received a $120,000 PPP loan in April 2020. These funds were fully spent on its 10 employees by September 20, 2020. Previously, the restaurant would not have qualified for ERTC. Under the new law, the operation can now reach back to its wages for the 4th quarter of 2020 (Oct.-Dec.) and obtain up to $5,000 per eligible employee (50% credit of up to $10,000 in eligible wages) in ERTC.
Result: Henry’s Hotcakes gets up to $50,000 in ERTC for Q4 2020 wages it paid.
Example 2: Henry’s Hotcakes is eligible for a Second Draw PPP loan but would also like to coordinate to receive ERTC for its 10 employees during the 1st quarter of 2021 (Jan.-March).
On February 1, 2021, the restaurant receives a Second Draw loan of $168,000 (at the 3.5 multiplier for restaurants/accommodations) and selects a 24-week covered period to use those PPP funds. It spends 40% of the loan on rent, protective equipment, cleaning supplies, a new drive-thru window, and other forgivable PPP expenses in February and March 2021. Beginning April 2021, the restaurant spends the rest of the PPP funds (60%) on eligible payroll expenses for the remainder of the covered period. For the 1st quarter of 2021 (Jan.-March), the restaurant files for the ERTC and obtains $7,000 per eligible employee (70% credit of up to $10,000 in eligible wages).
Result: Henry’s Hotcakes obtains up to $70,000 in ERTC for Q1 2021 wages it paid. ...
Henry’s Hotcakes uses a Second Draw PPP loan to cover both Q1 (Jan.-March 2021) non-payroll expenses and Q2 (April-June, and even parts of July, 2021) payroll expenses, depending on the covered period.
The upshot: Restaurants can now receive up to $5,000 per employee for 2020 and up to $14,000 ($7,000 per employee in each of the first two quarters of 2021) for a potential total of $19,000 per eligible employee in ERTC.
“For a restaurant that fought uphill for the last quarter of 2020 with say, 50 full-time employees, it’s an amazing opportunity to access up to $250,000 in ERTC,” explains Aaron Frazier, director of Healthcare and Tax Policy.
“We strongly encourage restaurants to consider synchronizing their Second Draw PPP loan and ERTC for the first half of 2021, as 40% of the loan can be used for forgivable non-payroll expenses while the restaurant accesses ERTC to support payroll.”
We urge restaurateurs to learn more about this new law (see links below) and engage your tax and finance specialists to ensure you don’t leave this money on the table.
ERTC Forms and Guidance:
“Employers May Be Able to Claim the Employee Retention Credit and Have a PPP Loan,” IRS, January 28, 2021
“Form 7200: Advance Payments of Employer Credits Due to COVID-19,” IRS documents for 2021 ERTC, January 2021
“Significant Enhancements to the Employee Retention Tax Credit (ERTC): Maximizing the ERTC in 2020 and 2021,” BDO, January 11, 2021
“FAQs: Employee Retention Credit under the CARES Act,” IRS
Note that the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, amended and extended the employee retention credit (and the availability of certain advance payments of the tax credits) under section 2301 of the CARES Act. These FAQs do not currently reflect the changes made by the Taxpayer Certainty and Disaster Tax Relief Act of 2020; however, please continue to check back on this page for any updates related to the change in law.
Disclaimer: This content is for informational purposes only, and should not be used as legal, tax, investment, financial, or other advice. This information is of a general nature and does not address the circumstances of any particular individual or entity. The document does not constitute professional and/or financial advice, nor does any information constitute a comprehensive or complete statement of the matters discussed or the law. The reader of the document alone assumes the sole responsibility of evaluating the merits and risks associated with the use of any information before making any decisions based on such information.