Recovering from the devastating impact of COVID will prove to be a long journey for the restaurant industry. Recent data shows that sales are $240 billion below normal, 8 million employees have been laid off or furloughed, and over 110,000 eateries closed for good in 2020, and it’s evident the way back to pre-crisis level of sales and employment will not be straightforward. Before restaurants can embrace the new normal, they need foresight and careful planning to return to some kind of stability.
During the pandemic, restaurant owners digitized operations, invested in covid-safe packaging for home deliveries, and developed app-based ordering to survive. Despite acting as a lifeline to struggling restaurants, these innovations increased operational costs. Spending money to stay afloat in an era of plummeting sales was a catch-22 situation.
Fortunately, recent legislative changes have made it easier for restaurants to fund a recovery plan and quickly infuse cash back into their business. Congress is now providing the capital necessary to help business owners in this industry bounce back by way of the Employee Retention Credit.
The government is keen on bringing the restaurant industry back to its feet. The reason is simple: the restaurant industry is the second-largest private sector employer in the U.S., hiring 10 percent of the entire workforce in 2019.
The Employee Retention Credit (ERC) was designed to encourage businesses to keep employees on payroll. When the CARES Act came into effect in 2020, restaurants used the Paycheck Protection Program loans (PPP) to fund their operations. But since PPP and ERC were mutually exclusive incentives, these businesses remained ineligible for the Employee Retention Credit until the passage of the Consolidated Appropriations Act of 2021 last December.
Act Now to Claim the Employee Retention Credit
Employers who received PPP loans and/or have had their loan forgiven are now eligible to also claim the Employee Retention Credit on wages not paid by PPP loans. But even with the change in ERC rules, a lot of eligible restaurants are still not claiming this credit due to lack of awareness. The business owners of these restaurants are either simply unaware of this credit or preemptively disqualify themselves thinking they are ineligible for it. These businesses are missing out on credits (up to thousands of dollars per employee) that they could have used to:
- Eliminate payroll tax
- Invest in capital
- Hire more talent
- Rebuild their business
Which restaurants qualify for the Employee Retention Credit?
- To be eligible for this tax credit, you must satisfy at least one of two conditions:
- Your business operations were fully or partially interrupted and/or suspended
- Your business experienced a decline in revenue (20 percent in gross receipts when compared with the same quarter of 2019)
That said, even if you do not have any tax liability, you can still receive a cash refund. In fact, the key to qualifying is not just revenue or tax liability: if your daily operations were altered in any way because of the pandemic, you are in an excellent position to claim the credit.
Even if your business grew during the pandemic, you may still qualify for the Employee Retention Credit. If you can show how the pandemic impacted your business and its operations, this incentive will surely provide a much-needed boost to your business.
Finally, restaurants should not only claim this credit but also maximize its benefit by combining it with other government incentives like the Work Opportunity Tax Credit (WOTC). This reward incentivizes employers to hire workers from targeted groups who have historically faced significant barriers to employment, while helping to sustain businesses and jumpstart recovery for the American hospitality industry.
The Employee Retention Credit is an incredible opportunity to get your business back on its feet, and can help lay a solid foundation for success as restaurants resume business as usual.
Dean Zerbe is alliantgroup’s National Managing Director. Zerbe has had a major impact on U.S. tax legislation and is committed to helping small and medium-sized business claim major tax credits and economic support.