Restaurant business owners can navigate the complexities of ERC eligibility, by simply understanding how qualified wages paid and tips work. Whether a small diner or a large restaurant chain, passing the government order test alone may be enough to make you eligible to claim the ERC credit.
The COVID-19 pandemic had a significant impact on the restaurant industry, causing many ERC-eligible businesses to close their doors or operate with capacity restrictions. To help offset their financial losses, the federal government introduced the Employee Retention Tax Credit (ERTC) as part of the CARES Act in 2020.
The importance of the ERTC for restaurant business owners was significant in helping to offset payroll expenses and keeping employees on the payroll. Today, this fully refundable tax credit can still be claimed by all eligible employers who retained W2-eligible employees during the pandemic. Even a recovery startup business or those who received a Paycheck Protection Program (PPP) loan can collect an ERC refund check.
To qualify for the Employee Retention Tax Credit (ERTC), restaurants must meet certain eligibility criteria. The primary qualifying factors for the credit include a decline in gross receipts or a partial or full suspension of operations due to COVID-19.
Gross Receipts Test
Restaurant business owners must have experienced a significant decline in gross receipts during the pandemic to claim the ERC. Specifically, the decline must have been more than 20% in any quarter during 2021, as compared to the same quarter in 2019
The alternative quarter election rule was further added to the Coronavirus Tax Relief Act of 2021 which allows restaurants to qualify using a prior calendar quarter in comparison to 2021 claims.
2020 ERC claims have very strict rules. with gross receipts compared to the same calendar quarter in 2019 requiring a decline of at least 50%. However, at times only one qualifying quarter is needed to reach the $5,000 per employee maximum credit for 2020.
Government Order Test
A partial or full suspension of operations due to COVID-19 can also help restaurants qualify for the employee retention credit (ERC). This could include government orders to close or operate at limited capacity, supply chain disruptions, or employee absences due to illness or quarantine.
To qualify for a 2020 claim, the full or partial shutdown order must have affected a restaurant business by limiting commerce, travel, or group meetings for more than seven consecutive days. For 2021 claims, the governmental order can be more than seven non-consecutive days that fell within a single quarter.
During the COVID-19 pandemic, restaurant employers faced unprecedented challenges that disrupted normal business operations and impacted their ability to generate revenue. From dining capacity limitations to supply chain issues, numerous restaurant operations were directly affected by a government mandate.
Any government restriction related to a reduction in hours of operation can claim eligibility for the ERC by demonstrating a nominal impact. A calculation of fewer hours resulting in fewer customers and reduced revenue could be enough to prove an inability to carry out normal trade or business.
Many government mandates during the pandemic required restaurant companies to close indoor dining to help limit the spread of COVID-19. By documenting the impact of these orders on gross receipts and operations, restaurant owners make themselves eligible for the ERC.
A limitation on the number of diners allowed inside a restaurant at one time was often enforced via a local governmental authority. Meeting their social distancing requirements greatly reduced seating capacity in many outdoor restaurant services too, leading to a reduction in revenue.
Certain types of restaurants, such as buffet-style or self-serve establishments were particularly vulnerable to government suspension orders. The required levels of patron safety and sanitation were near impossible to meet. Demonstrating a nominal effect from buffet closure can often be enough to determine a restaurant’s eligibility.
Carry Out Only
Many small business owners were forced to only offer carry-out or take-away services to meet social distancing guidelines which significantly affect their restaurant’s financial health.
Some of the hardest-hit businesses during the pandemic were restaurants with bars and nightclubs. A full or partial suspension order may have forced them to close for extended periods causing heavy financial losses.
With many event venues closures during the pandemic, restaurants that relied on catering or hosting events were deprived of a regular source of income.
Claiming employee retention credits can be quite complex, since the rules have changed several times since it was introduced in the Coronavirus Aid, Relief, and Economic Security Act (C.A.R.E.S.)
Restaurant owners who received PPP loans are still eligible for the ERTC, but the same wages cannot be used to claim both credits.
Many CPA firms who do not specialize in ERC filings may not fully understand the changes the US Congress made in the Consolidated Appropriations Act, American Rescue Plan, and the infrastructure bill which can specifically benefit restaurateurs.
Eligibility requirements based on supply chain issues, typically also require a specialized tax attorney, and your accountant may not qualify you for a specific quarter because they are unwilling to sign off on something they know nothing about.
If you don’t want to leave money on the tax, always consult with a tax professional that specializes in calculating the credit correctly and claiming the maximum benefit possible.
Below you’ll find answers to our most frequently asked questions about which restaurants can qualify, and how to calculate qualifying wages.
Any restaurant business that experienced a significant decline in gross receipts or had to suspend operations due to a government order related to COVID-19 can apply for the employee retention tax credit.
Yes, but the same wages cannot be used to claim both employee retention credits and PPP loan forgiveness. Loan amounts for PPP draw 1 and 2 must be deducted from qualified wages paid before filing your claim.