Operations
How to find out if your restaurant is eligible for tax refunds
Andre Shevchuck, of BPM's Research and Development Tax Credit Consulting practice, breaks down the eligibility requirements of the CARES Act.
March 31, 2021 by Andre Shevchuck
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, better knowing as the "CARES Act," which was a $2.2 trillion stimulus bill signed into law in response to the economic fallout from the COVID-19 pandemic.
Among the stimulus provisions in the CARES Act was a generous refundable employment tax credit named the Employee Retention Credit, or "ERC," that was designed to allow eligible employers to receive immediate access to the credit by reducing the employment tax deposits they are otherwise required to make, thereby encouraging businesses to keep employees on their payroll.
The CARES Act's ERC was introduced to stimulate businesses during Q2, Q3, and Q4 of 2020. Since then, other Acts have been recently passed that have improved and expanded the ERC's eligibility through 2021.
Who is an "eligible employer" able to claim the ERC?
For a business to qualify for the ERC under the CARES Act, it needs to meet one of the following eligibility tests:
- The business had operations fully or partially suspended due to government order because of the pandemic.
- For 2020: The company saw a decline in gross receipts greater than 50% during a quarter in 2020, compared to the same quarter in 2019.
- For 2021: The company saw a decline in gross receipts greater than 20% during a quarter in 2021, compared to the same quarter in 2019.
What is the benefit?
The amount of the credit is determined by a credit rate of 50% in 2020 or 70% in 2021 multiplied by an amount of "qualified wages," a combination of gross wages and health-care premiums up to a $10,000 maximum. Put very simply, if eligibility requirements are met, the ERC could generate as much as $5,000 per employee in 2020 for the entire year. For 2021, the ERC can generate as much as $7,000 per employee, per quarter, a big increase in generosity. As the credit is refundable, this means that if your ERC is in excess of the payroll tax you are otherwise liable for, that excess amount of credit is refundable to you. However, with all things tax related, the computation and eligibility requirements have many nuances that require careful reading. For example:
- How to define gross receipts?
- How to treat aggregated businesses?
- How does the number of employees determine the amount of credit you are eligible for?
- What types of governmental orders may be taken into account for the ERC?
- How to determine qualified wages?
The IRS has introduced no less than 94 frequently asked questions as guidance to assist businesses and their consultants with determining the correct amount of credit. However, these FAQs are already outdated and do not reflect the changes made to the ERC by the most recent Acts. To supplement the FAQs, the IRS has issued new guidance to clarify the ERC requirements seen in Notice 2021-20. The examples provided in the FAQs and the guidance in Notice 2021-20 are extremely helpful in determining how businesses might be eligible especially when it comes to the "partially suspended" eligibility criteria which can be subjective.
In Notice 2021-20 there are three specific examples that highlight restaurants:
- Employer F, a restaurant business, must close its restaurant to onsite dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. Employer F is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. On-site dining is more than a nominal portion of Employer F's business operations. Employer F's business operations are considered to be partially suspended because, under the facts and circumstances, more than a nominal portion of its business operations—its indoor and outdoor dining service—is suspended due to the governmental order.
- Same facts as Example 1, except that two months later, under a subsequent governmental order, Employer F is permitted to offer sit-down service in its outdoor space, but its indoor dining service continues to be closed. During this period, Employer F is allowed to operate only its outdoor sit-down and carry-out service in accordance with the order. Indoor dining is more than a nominal portion of Employer F's business operations. Employer F's business operations are considered to be partially suspended because, under the facts and circumstances, more than a nominal portion of its business operations—its indoor dining service—is suspended due to a governmental order. The following month, under a further governmental order, Employer F is permitted to offer indoor dining service, in addition to outdoor sit-down and carry-out service, provided that all tables in the indoor dining room must be spaced at least six feet apart. This spacing constraint has more than a nominal effect on Employer F's business operations. During this period, even though Employer F resumed all categories of its business operations, Employer F's business operations continue to be partially suspended because, under the facts and circumstances, the governmental order restricting its indoor dining service has more than a nominal effect on its operations.
- A restaurant is ordered by a local health department to close due to a health code violation. Since the order is unrelated to COVID-19, it would not be considered a governmental order for purposes of the employee retention credit.
If Examples 1 or 2 might apply to your circumstances you could be eligible to claim the ERC even if your decrease in gross receipts compared to similar quarters in 2019 did not have significant drop offs. This is critical because virtually all restaurants were at some point affected by governmental shut downs. Also, if you received a PPP loan and were told that your business was ineligible to claim the ERC, as was the case initially with the CARES Act, the subsequent Consolidated Appropriations Act, retroactively did away with that restriction and you could now be eligible to claim the ERC.
As mentioned previously, there are many nuances and caveats in determining how much credit you may be entitled to. Reach out to your payroll provider as well as your tax consultant for advice in making ERC claims.
About Andre Shevchuck
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