As we round three years from the start of the pandemic, most of the special programs and incentives for businesses have come and gone. The employee retention tax credit is one that businesses—especially restaurants—can still take advantage of, for the time being.
During the last few chaotic years, many restaurants simply overlooked this credit or didn’t have the bandwidth to take advantage of it. While it applies to Q2 of 2020 through Q3 of 2021, it can be claimed retroactively. But the statute of limitations on these credits begin to expire on July 31, 2023, so time is running out.
As the sunset date approaches, you may have seen ads about the ERC targeting restaurants and promising $26,000 in refundable tax credits per employee. While that is the maximum amount per employee, there are many factors in determining the refund amount. The IRS has warned of opportunistic scammers looking to take advantage of businesses to make a quick buck.
If executed properly, the ERC can represent a boon for many restaurants large or small. Here are some common misconceptions to clear up before taking advantage of this credit.
Myth 1: We did OK during the pandemic, so we’re not eligible.
Fact: There are two ways to qualify for the ERC. One is a drop in gross receipts, the other is a government order impeding business.
The required gross receipts reduction varies based on year. If your business had a 50 percent reduction in gross receipts from 2019 to the same quarter in 2020, you qualify. Once that threshold is met, eligibility is maintained throughout the end of the quarter in which gross receipts have less than a 20 percent drop.
In 2021, eligibility starts at a 20 percent reduction instead of 50 percent. Due to revised "safe harbor" language in the revised statute, taxpayers may use the prior quarter to determine eligibility in a current quarter. Therefore, if Q1 2021 qualifies, Q2 2021 will also qualify.
Even if you did booming business during the pandemic (lucky you!) you can still qualify for the ERC if government mandates, such as those limiting seating or requiring time-consuming cleaning procedures, impacted your ability to do business.
Comfort with being able to make a solid, fundamental argument of cause and effect is crucial.
“Here's the government order, here's the impact on my business, here's why it wasn't a nominal impact.” For instance, if dine-in amounted to 1 percent of the business and takeout was already 99 percent prior to the pandemic, the ERC is not going to apply. It’s about disruption.
Myth 2: We weren’t shut down, so we’re not eligible.
Fact: A complete shutdown did not have to occur. Restaurants qualify due to the amount of disruption owners were forced to deal with (due to federal, state, or local government orders) in the name of remaining open.
Myth 3: You automatically get $26,000 per employee.
Fact: The maximum you could possibly get per employee is $26,000. The max credit for each employee in 2020 is $5,000. The program was expanded in 2021 and the max for each employee for each of the three quarters the ERC existed that year is $7,000 ($21,000 total). So the cap is set at $26,000 per employee if all eligibility requirements are met.
The ERC is a payroll tax credit that is refundable and gets applied against the employer portion of the payroll taxes. The ERC reduces deductible wages, therefore, it in essence is taxable. The net impact would depend on the owner’s tax bracket.
While $26,000 per employee may be achieved, beware of scammers and invoke proper due diligence to avoid being vulnerable to audits.
Myth 4: I took the PPP loan, so I can't take the ERC.
Fact: This was briefly true, but that statute was changed. There are still restrictions, such as not being able to double-dip on the same dollar. A business owner has to make sure they understand which dollars are included as qualified wages and which ones are not because of the PPP loan already received.
Myth 5: A supply-chain issue makes my business eligible.
Fact: When an advertisement states, “Did you have a supply disruption? You're guaranteed $26,000 per employee,” that’s just not true.
A supply-chain issue caused by a government order that impacted a supplier’s ability to run their business is what creates eligibility. There can be a lot of reasons for supply-chain issues, but in this case it has to be due to a government shutdown and the business can not have available access to similar supplies.
This is harder to prove than a government order that directly impacted your business. Were you unable to get takeout containers or ketchup packets because of a government order that affected your supplier? Possibly, but there are additional steps there than merely showing an executive order from the governor of your state restricting indoor dining.
Myth 6: I missed the credit and it’s too late to apply.
Fact: The statute of limitations to file an amended payroll return is three years from the date the returns were filed. These are all quarterly returns, so the first ones that could have been filed to claim the ERC were July 31, 2020. The ability to claim that first quarter of the ERC disappears after July 31, 2023. On October 31, 2024, the window to qualify for the last quarter of the ERC (Q3 of 2021) will expire.
Bill Claffey is a tax attorney at the Connecticut accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs). He advises restaurants and other small businesses in New England.