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ERC Tax Credit for Restaurants

The Employee Retention Credit (ERC) provides much needed relief to the restaurant industry.

The purpose of the Employee Retention Credit is to encourage employers to keep employees on the payroll, even if they are not working during the covered period due to the effects of the COVID-19 outbreak. The restaurant industry makes up 10% of the US workforce and has been hit particularly hard by the coronavirus outbreak.

Because of the overall effect of the pandemic on labor and the economy, the IRS has issued specific guidance on how they currently view the ERC, particularly for the restaurant industry.

This article will in layman’s terms explain what the ERC is, how a business can determine if it qualifies, and how it can calculate the credit.


What is the ERC credit?

The ERC was signed into law on March 17, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The credit was available but mostly ignored because a company could not apply for both the PPP and the ERC, and the PPP was more advantageous.

The Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act) was released on December 27, 2020. This act enabled a taxpayer to take both the PPP and ERC and greatly increased the amount of the ERC credit available.


How much is the ERC credit?

The credit is calculated on a quarter-by-quarter basis. The maximum amount per employee is $5,000 for 2020, and $7,000 per quarter in 2021.

The restaurant industry in particular has many part-time employees. An easy way for a restaurant to estimate the ERC credit is:

  • Multiply the wages of all employees that do not make $10,000 per quarter by 70%
  • Add a $7,000 credit for each employee that makes $10,000 per quarter.


    Example
    Restaurant A has two managers that make more than $10,000 a quarter and 30 employees that make less than $10,000.

Wages for 30 employees per quarter                  $150,000
ERC Percentage                                                       70%  
ERC credit for employees                                   $105,000

ERC Credit for managers (2 x $7,000)               $  14,000
Total ERC Credit for Q-1 2021                            $119,000

A restaurant will do this calculation for each quarter of 2021 that it qualifies for the ERC. To calculate 2020 simply change the ERC percent to 50% and the ERC Credit for managers to $5,000.


How does a restaurant qualify for the credit?

A test is done each quarter to determine if the company qualifies. To qualify during a quarter a company has to either:

  • Be partially or fully suspended due to COVID-19 orders from an appropriate government authority

or

  • Experience a significant decline in gross receipts defined as less than 80% of gross receipts for the same calendar quarter in 2019. (50% decline for Q-4 of 2020).



What does that mean?

2019 had no government orders related to COVID and no COVID-19 outbreak. Therefore, this is the year that a business will use to compare current operations to. If a restaurant had a decrease of 20% of gross receipts when comparing a quarter in 2021 with the same quarter in 2019, then it passes this test. The restaurant does not need to tie the sales decrease to COVID-19.

If a restaurant cannot pass the gross receipts test, it can still qualify under the partial suspension test. Partial suspension means that a restaurant only has to show a negative effect of a government order on either sales or hours (10% or greater). Partial suspension is a lower bar but a harder test because a restaurant must tie an effect on sales to a government order related to COVID-19.



Okay. So how does a restaurant pass this test?

What I am seeing in the restaurant industry is that the restaurants that were able to survive were those that were able to adapt. For the most part they have converted their indoor operations to outdoor operations and carry out. They have a hard time meeting the gross receipt test, but they are able to meet the partial suspension test.

The IRS currently considers a reduction in indoor capacity due to a government order as a partial suspension, if the reduction in capacity has a more than nominal effect (10% or greater) on operations. Most restaurants that were designed for indoor dining can measure the effect of this reduced capacity and can tie this to a government order.




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