The Employee Retention Credit (ERC) is a valuable tax credit designed to encourage employers to keep employees on the payroll despite the COVID-19 pandemic's impact on their businesses. The ERC was originally established by the CARES Act, which was enacted in March 2020. A refundable payroll credit, the ERC provides eligible employers with a tax credit equal to 50% of up to $10,000 per employee in qualified wages paid between March 13 and December 31, 2020. Initially, an employer was eligible for the ERC if either:
- Its operations were fully or partially suspended due to a COVID-19-related government shutdown order; or
- It experienced a significant decline in gross receipts.
For smaller businesses (those with 100 or fewer employees), wages qualified for the ERC even if they were paid to employees who continued working. Larger businesses could only claim the credit for wages paid to employees who were not providing services.
Many restaurant owners have discounted the ERC, assuming they are ineligible because they did not shut down completely, did not lose enough business to qualify or received a Paycheck Protection Program (PPP) loan. However, as discussed below, recently enacted legislation permits employers to claim the credit even if they received a PPP loan.
Recent Legislation
Under the CARES Act, employers that received PPP loans were ineligible for the ERC. However, the Consolidated Appropriations Act (CAA), enacted in December 2020, eliminated this restriction retroactively to March 13, 2020. Therefore, employers that received PPP loans in 2020 can claim the ERC for qualified wages paid in 2020 to the extent those wages were not paid with the proceeds of a forgiven PPP loan (by amending their 2020 returns if already filed).
The ERC is even more valuable in 2021. Under the CAA and the more recent American Rescue Plan Act (ARPA), the maximum ERC in this year is 70% of up to $10,000 in qualified wages per quarter - in other words, up to $28,000 per employee for the year.
Additionally, it is now easier to show a significant decline in gross receipts and the category of businesses that can claim the credit for employees who continue working has been expanded to include those with 500 or fewer employees. However, the ERC cannot be claimed for wages paid with a grant from the Restaurant Revitalization Fund.
What is a "Partial Suspension"?
Many restaurants have shut down completely due to the COVID-19 pandemic and many more have continued to operate in a limited capacity. Examples include offering takeout or delivery only, providing only outdoor seating, limiting indoor seating capacities or reducing business hours.
A restaurant whose operations are partially suspended due to a government shutdown order is eligible for the ERC even if it has not experienced a "significant decline" in gross receipts. Under IRS Notice 2021-20, a partial suspension means "more than a nominal portion" of your business operations are suspended. "More than nominal" means the business portion accounts for:
- At least 10% of total gross receipts; or
- At least 10% of total employee service hours.
It should be noted that IRS Notice 2021-20 only applies to 2020. However, the IRS is expected to address calendar quarters in 2021 in future guidance.
Do Not Leave Money on the Table
If your restaurant business has been affected by the COVID-19 pandemic, you may be entitled to valuable employee retention tax credits, even if you were not shut down completely and even if you received one or more PPP loans. To avoid leaving money on the table, contact your ORBA advisor to discuss your eligibility for the ERC.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
