The Employee Retention Credit will continue to provide cash relief to the hospitality industry, including restaurants and hotels.
However, there is help available in the form of an employee payroll tax credit, which has already distributed millions of dollars in refundable credits and cash to employers in the retail and hospitality industries. Although hotels and restaurants are still experiencing financial difficulties, there is hope in the form of this credit.
The Employee Retention Credit, abbreviated as “ERC,” becomes available to businesses in March of 2020 as an incentive to continue keeping employees on their payrolls. Hotels and restaurants who have had financial difficulties as a result of the COVID-19 outbreak are eligible for this credit, which is currently one of the most significant tax credits that can be claimed.
Even if business is picking up at the moment, many employers in the retail and hospitality industries are still getting this tax credit as a result of the challenging financial climate that prevailed throughout the years 2020 and the first three quarters of 2021.
Who Can Take Advantage of the Employee Retention Credit?
Employers in the hotel and restaurant industries that meet the following criteria are eligible for the Employee Retention Credit, a monetary incentive that can exceed payments made for payroll taxes.
- were impacted by government directives restricting the number of people who could attend religious services and other types of gatherings; or
- whose total sales have dropped by a substantial amount in recent years
Even organizations who have already been awarded ERC funding in the form of PPP loans, Restaurant Revitalization Funds, or Shuttered Venue Operator Grants are eligible to apply for further ERC benefits. In point of fact, the vast majority of employers that Cherry Bekaert has assisted in acquiring the ERC have also been eligible for other types of incentives.
Companies that did not begin operations until after February 2020 may be eligible for particular starting regulations that, in 2021, will grant refundable credits worth up to a maximum of one hundred thousand dollars.
What are the advantages of using ERC?
Your organization has a chance of being eligible for four different ERCs that are determined separately:
1. 2020 ERC
- The maximum amount of credit per employee is $5,000.
- Quarters 2-4 were included on forms 941-X for reporting purposes.
2. 2021 Quarter 1 ERC
- Maximum credit = $7,000 per employee
- Submitted on Form 941-X for the First Quarter of the Year
3. 2021 Quarter 2 ERC
- Maximum credit = $7,000 per employee
- Quarter 2 information was reported on Form 941-X.
4. 2021 Quarter 3 ERC
- The maximum amount of credit per employee is $7,000.
- Quarter 3 activity was reported on Form 941-X.
How to Meet the Requirements for the Employee Retention Credit?
The Test Required by the Government
In order to be eligible for the ERC, a company must demonstrate that it either completely or partially halted operations as a result of an order issued by an appropriate governmental entity to restrict trade, travel, or group meetings as a result of COVID-19. As long as the government rules remain in place, the employer is required to continue paying eligible wages during this time period.
Hotels and restaurants that were able to maintain regular operations for certain aspects of their business but had to completely or partially suspend other aspects of their operations (such as in-house dining vs carry out) may also be eligible for the ERC.
The following are some examples of situations in which a full or partial stoppage of operations could be appropriate to consider:
- An order from a municipality or state that compels employees to do their duties from home
- A prohibition on the holding of public meetings (e.g., wedding receptions, other events)
- The imposition of capacity restrictions on public or private facilities, which results in the necessitation of the cancellation of pre-planned conferences
- Space and eating limits imposed within the establishment
Gross Receipts Test
The employer will be considered an Eligible Employer if, during the first, second, and third calendar quarters of 2021, the hotel or restaurant’s gross receipts are lower by more than 20 percent when compared to the organization’s gross receipts during the same calendar quarter in 2019; this will allow the employer to qualify for tax credits.
Because of the necessity to prove a gross receipts fall of more than fifty percent, it may be more challenging to satisfy the gross receipts decline criteria for the year 2020.
Some Illustrations of Gross Receipts:
- Includes money received from charitable donations and returns on investments
- The taxpayer’s adjusted basis in certain properties utilized in a trade or business or capital assets sold does not affect the taxpayer’s tax liability.
- Comprises all money earned through investing
- Dividends
- Interest
- Rents
- Royalties, pensions, and other payments
- The applicable tax accounting technique for the recognition of income
Improved Benefits for the Year 2022
Total Number of Employees Working Full-Time
In 2021, the minimum number of full-time workers required to be eligible for the ERC increased to 500 from the previous level of 300. Previously, for the purposes of the ERC calculations in 2020, only hotels and restaurants that had 100 or less full-time employees (as assessed, on average, in 2019) were eligible to receive the maximum benefits that were made available by the ERC.
Rate of Credit
In 2021, there will also be an increase in the maximum percentage of eligible salaries that may be allocated to the ERC.
- Credit for the year 2020 equal to fifty percent of the eligible salaries (including the cost of healthcare provided by the employer) paid to each employee The maximum amount of money that may be considered qualified wages is $10,000 per employee.
- Credits for the year 2021: Seventy percent of the eligible earnings (including employer-paid healthcare) paid to each employee for each calendar quarter for the first, second, and third calendar quarters. The maximum amount of qualified wages that can be paid to an employee in a quarter is $10,000.
Are Recipients of PPP Loans and RRF Eligible to Apply for ERC?
Companies that have obtained loans via the Paycheck Protection Program (commonly known as “PPP”) are also eligible for the ERC. When the ERC was initially allowed as part of the CARES Act, it was statutorily forbidden for any organization that had previously received funds under PPP to claim an ERC. This restriction remains in effect.
Later, in December 2020, the legislative bar against PPP users collecting ERC payments was eliminated. This occurred when the ERC was extended and improved as part of the Consolidated Appropriations Act.
When it comes to evaluating eligibility, the Internal Revenue Service made it clear in August 2021 that neither PPP loans nor Restaurant Revitalization Funds (“RRF”) should be included in the definition of gross receipts.
Prerequisites for Filing an Application for the Employee Retention Credit
The following is a list of the information that proprietors of hotels and restaurants are need to give in order to apply for an ERC:
1. The total number of people working for the Controlled Group of Companies on a full-time basis
- Employees Working Full-Time for the Year 2019
- A full-time equivalent employee is one who works more than 130 hours per month.
2. Gross Receipts
- You are required to submit your Total Gross Receipts for each of the Qualifying Quarters in 2019, 2020, and 2021.
3. Obligations Implied by the State
- Think about the areas in which you may have been impacted by government instructions (causing a full or partial shutdown)
- Collect any corporate locations where instructions from the government may have prompted a partial closure of operations.
4. PPP Loan Documents
- You are need to provide all of the documents pertaining to the PPP debt forgiveness in order to establish what costs are being used for forgiveness.
5. Wage Data
- Wages, broken down by pay cycle, for each employee within the time period that the PPP loan covers (s)
- Copies of the 941 tax returns for payroll for the years 2020 and 2021
Conclusion
The proprietors of hotels and restaurants should consider reevaluating whether or not they are eligible for the ERC. Many organizations are obtaining huge monetary advantages in addition to the PPP benefits that they have previously received as a result of the large number of government restrictions that will restrict routine activity in 2020 and 2021. For additional information, feel free to download the booklet for Cherry Bekaert’s Employee Retention Credit.
Contact your Cherry Bekaert adviser or Martin Karamon, Tax Principal and leader of Cherry Bekaert’s ERC Services Team, to get further information on the Employee Retention Credit and to obtain direction regarding how to qualify for the credit.