Employee Retention Credit $$$ for Restaurants
By now, you have probably heard about the Employee Retention Credit (ERC) and the possibility that your business may be eligible to reap its potentially substantial benefits. We have devoted much time and efforts into learning the details of the law and are awaiting clarification of some of its terminology. Additionally, there are different rules for 2020 versus 2021.

Before 12/27/2020, you were not eligible to participate in the Paycheck Protection Program (PPP) and the ERC. However, due to the December Relief Bill, even if your business received PPP funds, your business may now be eligible for the ERC. However, you cannot use the same wages for the ERC (or the FFCRA) that were used or will be used for the PPP loan forgiveness applications. Also, your business may not claim the ERC and the WOTC for the same employee for the same period of time.

The eligibility is based on either a large decrease in sales OR a “full or partial suspension of business operations due to a written government order”. The latter must have “more than a nominal effect” on business operations. Most of you will not qualify based on the decrease in sales, so then you must look at the qualifications for a full or partial suspension of business operations.

The IRS recently published much needed guidance (IRS Notice 2021-20) clarifying the interplay between PPP wages and ERC wages. The notice (102 pages long) also expanded upon the definition of partially suspended, nominal portion, nominal effect and much more. The term fully suspended is obvious, for instance if a COVID-19 governmental order shut down your restaurant, however, what is partially suspended? Here are a few examples that may be considered partially suspended, these must be a result of a COVID-19 written governmental order:

  • On-site indoor and/or outdoor dining prohibited, but carry-out, drive-through, curbside, or delivery permitted. Assuming the on-site dining is more than a nominal portion of the restaurant’s business operations.

  • On-site indoor permitted, but must have socially distanced tables, i.e. 6 feet apart. Assuming this has more than a nominal effect on the restaurant’s business operations. 

As you may have noticed, these hinge on certifying that the suspension is related to “more than a nominal portion” and had “more than a nominal effect” on the business operations. The IRS Notice says that “a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of the business operations if the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019)”. Also, the IRS Notice says that “a governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent will be deemed to have more than a nominal effect on the employer’s business operations”. These will have to be considered on a case-by-case basis.

If you are eligible based on the above, you then need to determine how many full-time employees (an average of at least 30 hours/week or 130 hours/month) you had in 2019. Generally, to be eligible for the credit in 2020, that number must be 100 or less, for 2021, 500 or less (both based on 2019 full-time employees). There are special provisions for employers over these thresholds, that are outside of the scope of this summary.

The ERC is a credit taken against your Federal employment tax deposits reported on Form 941. For the 2020 ERC, the credit is achieved by amending applicable Forms 941 (which can be done anytime in the next several years). For the 2021 ERC, the credit is achieved when filing the 1st or 2nd quarter 2021 Forms 941 or reducing any upcoming 2021 payroll tax deposits. Any amount of the credit in excess of eligible quarterly payroll taxes is refunded to your business.

If you operate multiple businesses with common ownership, there are also aggregation rules that will apply. This will have to be analyzed on a case-by-case basis, to determine which entities will have to be aggregated, and considered as one for determination of business operations and number of full-time employees.

Also keep in mind that you will have to maintain records to substantiate the eligibility for the credit, as the IRS has at least four years to review. You will need to have documentation to show how you determined your eligibility, including written government orders of suspension, records of “more than a nominal portion” and “more than a nominal effect”, qualified wages by employee, documentation of aggregated group members, and copies of payroll tax forms.

As you can tell, this is a very complicated issue, and there are many things to consider. As with the PPP rules, the ERC rules are also subject to change and to clarification. The good news is that Bodine Perry is here to help you! We did issue a more detailed summary of the ERC rules a few weeks ago and have attached that for your reference.
We welcome your questions and are here to assist you with the ERC analysis and calculations, for both 2020 and 2021. We will keep you updated as more information becomes available. Thank you for your business and we appreciate the confidence you place in our firm.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.