At this point in the restaurant recovery, the Paycheck Protection Program and Restaurant Revitalization Fund are in operators’ rearview. Whether they replenish or return, namely the RRF, remains unknown, and is a risky lifeline to count on regardless. But the Employee Retention Tax Credit, while not a headliner on the scale of the others, has potential to still lift operators out of the pandemic pit, especially with employee retention.

Brent Johnson, co-founder and CEO of Clarus, a company that specializes in tax credits, believes the ERTC will not only have significantly more funds available than PPP, but that it will do more to spur economic development.

Before getting into why, here’s a look at what the ERTC is and how it could aid restaurants.

The baseline: Eligible restaurants can access ERTC for both 2020 and 2021 for eligible employee wages as long as these specific payroll wages and/or group benefits were not directly paid with Paycheck Protection Program (PPP) loan funds, the National Restaurant Association said. Employers can access up to $5,000 per eligible employee in 2020, and up to $7,000 per eligible employee for each calendar quarter in 2021.

Restaurants can receive up to $33,000 per eligible employee in ERTC across 2020 (up to $5,000) and 2021 ($7,000 for each calendar quarter).

An example of this in action, per the Association: A restaurant that received a $120,000 PPP loan in April 2020 used the funds fully on 10 employees by September 20, 2020. Previously, this restaurant would not have qualified for ERATC. But after the American Rescue Plan Act, enacted March 11, the restaurant referenced can now reach back to its wages for the fourth quarter of 2020 (October to December) and obtain up to $5,000 per eligible worker (50 percent credit of up to $10,000 in eligible wages) in ERTC.

Another example:

This same restaurant is eligible for a second-draw PPP loan (this program ended May 31) but would also like to coordinate ERTC for its 10 employees during the first quarter of 2021 (January to March). On February 1, the restaurant receives a second-draw loan of $168,000 (at the 3.5 multiplier for restaurants/accommodations) and selects a 24-week covered period to utilize funds. The restaurant spends 40 percent of the loan on rent, PPE, cleaning supplies, a new drive-thru window, and other forgivable PPP expenses in February and March 2021. Beginning April 2021, the restaurant spends the rest of the PPP funds (60 percent) on eligible payroll expenses for the remainder of the covered period. For the first quarter of 2021, (January to March), the restaurants uses ERTC and obtains $7,000 per eligible employee (70 percent of credit of up to $10,000 in eligible wages) in ERTC.

So the restaurant obtained up to $70,000 for Q1 2021 wages in ERTC, and it used a second-draw PPP loan to cover both Q1 non-payroll expenses and Q2 and/or July payroll expenses, depending on the covered period.

One of the things that has made the ERTC challenging at times to follow and lean on are the changes. It’s evolved and expanded through Congressional updates.

PPP loan interaction

Prior law (March 13, 2020 to December 31, 2020): No ERTC if employer used a PPP loan

Prior law (March 13, 2020 to December 31, 2020): Employers that used a PPP loan can now claim ERTC as long as credits are not taken on direct PPP payroll expenses (wages, group benefits

Prior law (January 1, 2021 to June 30, 2021): Employers that used a PPP loan can now claim ERTC as long as credits are not taken on direct PPP payroll expenses (wages, group benefits)

New law (January 1, 2021 to December 31, 2021): Employers that used a PPP loan can now claim ERTC as long as credits are not taken on direct PPP payroll expenses (wages, group benefits)

Maximum creditable wages per employee

• Prior law (March 13, 2020 to December 31, 2020): $10,000 per year
• Prior law (March 13, 2020 to December 31, 2020): $10,000 per year
• Prior law (January 1, 2021 to June 30, 2021): $10,000 per year
• New law (January 1, 2021 to December 31, 2021): $10,000 per year

Maximum credit

• Prior law (March 13, 2020 to December 31, 2020): Up to $5,000 per employee
• Prior law (March 13, 2020 to December 31, 2020): Up to $5,000 per employee
• Prior law (January 1, 2021 to June 30, 2021): Up to $14,000 per employee
• New law (January 1, 2021 to December 31, 2021): Up to $28,000 per employee

Threshold to be considered a larger employer

• Prior law (March 13, 2020 to December 31, 2020): More than 100
• Prior law (March 13, 2020 to December 31, 2020): More than 100
• Prior law (January 1, 2021 to June 30, 2021): More than 500
• New law (January 1, 2021 to December 31, 2021): More than 500

Are you eligible for the ERTC?

The Association laid out the criteria:

• Employers of 100 or less full-time employees can access ERTC for on-premises, working employees in 2020 and employers of 500 or less full-time employees can access ERTC for on-premises, working employees in 2021. The employer status is calculated by counting the average number of full-time employees employed during 2019.
• A full-time employee is an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month.

—An employer that began business during 2019 determines the number of its full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2019 when operating and dividing by that number of months.

—An employer that began business during 2020 determines the number of its full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2020 when operating and dividing by that number of months, same as the approach for employers that began business operations during 2019.

• Aggregation rules apply when determining the number of full-time employees; in most cases all entities are considered a single employer if they are a “controlled group” of corporations, are under common control, or are aggregated for benefit plan purposes.

Eligible circumstances

• 1. Operations either fully or partially suspended due to orders from a governmental authority due to COVID-19, OR
• 2. The business experienced a significant decline in gross receipts when comparing either the calendar quarter or the prior quarter to the corresponding quarter in 2019.

To understand the “full or partial closure orders” during a calendar quarter due to government order, the Internal Revenue Service (IRS) provides these specific restaurant examples:

Capacity restrictions to enable social distancing: The following month, under a further governmental order, the restaurant 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. Under the facts and circumstances, the governmental order restricting the spacing of tables limits the restaurant’s indoor dining service capacity and has more than a nominal effect on its business operations. During this period, the restaurant’s business operations continue to be considered to be partially suspended because the governmental order restricting its indoor dining service has more than a nominal effect on its operations.

Indoor dining closed but outdoor is open: Same facts as No. 1, except that two months later, under a subsequent governmental order, the restaurant is permitted to offer sit-down service in its outdoor space, but its indoor dining service continues to be closed. During the period in which the restaurant is allowed to operate only its outdoor sit-down and carry-out service in accordance with the order, the restaurant’s business operations are considered to be partially suspended because, under the facts and circumstances, a more than nominal portion of its business operations—its indoor dining service—is closed due to a governmental order.

All on-site dining closed: A restaurant must close its restaurant to on-site dining due to a governmental order closing all restaurants, bars, and similar establishments for sitdown service. The restaurant is allowed to continue food or beverage sales on a carry-out, drive-through, or delivery basis. The restaurant’s business operations are considered to be “partially suspended” because a portion of its business operations—its indoor and outdoor dining service—is closed due to the governmental order.

What to know about the changes

These ERTC provisions have been added.

New Restaurant Revitalization Grants

Eligible entities which receive a Restaurant Revitalization Grant from the U.S. Small Business Administration may choose spend grant funds on payroll in calendar year 2021, which is an eligible expense. If the entity does meet payroll expenses with grant funds, the entity may not also receive ERTC for this payroll expense. The SBA and IRS will release more details on this coordination.

Advance Payments

Form 7200: For 2020, the IRS allowed employers to reduce deposits of employment taxes when anticipating ERTC for qualified wages by filing Form 7200. For 2021, advance payments of ERTC are permitted only for small employers (500 or fewer employees during 2019) and only up to 70 percent of the average quarterly wages paid by the employer in calendar year 2019.

Eligible Wages

Qualified wages are defined under section 3121(a) and section 3231(e) of the Internal Revenue Code. The employer’s health plan expenses can be included.

Ineligible Wages

Wages are qualified for ERTC only if the wages are made to an employee who continues to be employed by the employer. Any payments correlated with a former employee’s termination of employment are not qualified wages because they are payments for the past employment relationship and not attributable for employee retention credits.

The definition of compensation in section 3231(e) appears to exclude tips as a form of “eligible wages” for ERTC, as they are not paid by an Eligible Employer.

Tax Treatment

Qualified wages are calculated without regard to federal taxes imposed or withheld, including the employee’s or employer’s shares of social security taxes, the employee’s and employer’s shares of Medicare tax, and federal income taxes required to be withheld.

Deductions for qualified ERTC wages are not allowed for an employer’s federal taxable income under IRC Section 280C(a). Any employer receiving ERTC must reduce its deduction for salaries and wages by the amount of the ERTC.

Johnson broke down the ERTC for FSR, why it could make all the difference, and where operators should turn next. Restaurants who need help to determine eligibility can contact Clarus at https://clarusrd.com/

Firstly, tell us about the ERTC. What is it? How could it help restaurants?

Similar to the PPP, the Employee Retention Tax Credit is an incentive program enacted as part of Congress’s response to the COVID crisis and is intended to provide economic relief to employers whose operations were impacted by government order associated with the pandemic and yet continued to pay employees. Restaurants, potentially more than any other industry, had their operations impacted by government orders. Many jurisdictions only recently had the capacity restrictions completely lifted and could return to fully normal operations. 

During 2020, if an employer took a PPP loan they were ineligible for the Employee Retention Tax Credit program. However, in December 2020 that restriction was removed retroactively to when the program was established in March 2020. This retroactive removal of a significant restriction on participation in the program creates a look-back opportunity for most small restaurant operators.

How would a restaurant figure out if they’re eligible, or what are the factors that would signal to an operator the ERTC is something they should look into?

It’s hard to imagine that any restaurant wasn’t subject to restrictions (at least during 2020) that would create eligibility. Many restaurants continued to be subject to restrictions well into 2021 and that longer period of eligibility can create situations where the economics of the program become quite significant. All restaurants should at least consider their eligibility. The program is significantly more lucrative for small employers (fewer than 100 full-time employees in 2020 and fewer than 500 employees for 2021) so it’s an especially important program for smaller, independently owned restaurants.

What makes the ERTC potentially an even better lifeline than the PPP?

The PPP was first come, first serve and had a cap on the amount your business received. The only cap on the employee retention tax credit is based on the amount of qualified wages. If you expand your operations to capitalize on a new opportunity during an eligibility period the government can essentially cover 70 percent of your labor cost during the eligibility period.

Specifically, how could it help with employee retention?

For 2021, the credit is 70 percent of qualified wages (for a small employer all wages capped at $10,000 per quarter). In a tight labor market, knowing that can help your business compete for labor by offering one-time bonuses and competitive pay since you know that the government will be picking up 70 percent of the cost.

Say a restaurant does decide to proceed, what should they have in order? What are the first steps?

The program can be quite lucrative for restaurants but there are limitations on the same wages being used for multiple incentive programs (PPP, the Restaurant Revitalization Fund and the Work Opportunity Tax Credit program). You’ll want to have documents outlining your participation in those programs available to optimize the economics associated with this program.

What are some hidden benefits of the program you think most restaurants don’t know about?

There are ways your restaurant can know that it’s eligible for the third quarter now which could help you attract and retain workers in this incredibly tight labor market.

Is there anything else about the ERTC you’d like to share?

This program has received less attention than the PPP and the Restaurant Revitalization Fund programs but can be equally as lucrative for smaller restaurant groups. Those operators that identify and capitalize on the opportunity could accelerate the recovery of their restaurant.