Hotels and restaurants are still facing financial struggles, but relief is available from an employee payroll tax credit that already has awarded millions of dollars in refundable credits and cash to employers in the hospitality and retail industries.
The Employee Retention Credit (“ERC”) was launched in March 2020 to encourage businesses to keep employees on their payroll. Today, it is one of the most substantial tax credits available to hotels and restaurants that have encountered financial hardship caused by the COVID-19 pandemic.
Even if business is improving now, many employers in the hospitality and retail industry are still receiving this tax credit based on financial struggles during 2020 and the first three quarters of 2021.
Who is Eligible for the Employee Retention Credit?
The Employee Retention Credit, a cash stimulus that can exceed payroll tax payments, is available to hotel and restaurant industry employers that:
- were affected by government orders imposing capacity restrictions on services and other gatherings; or
- that suffered significant declines in gross receipts.
Even organizations that have received PPP loans, Restaurant Revitalization Funds, or Shuttered Venue Operator Grants can still apply for ERC benefits. In fact, most employers that Cherry Bekaert has helped with securing the ERC have also received other incentives.
Businesses that began operations after February 2020 may qualify for specific startup rules that can provide up to $100,000 in refundable credits in 2021.
What are the ERC Benefits?
Your organization may qualify for four separately calculated ERCs:
- 2020 ERC
- Maximum credit = $5,000 per employee
- Reported on forms 941-X for Quarters 2-4
- 2021 Quarter 1 ERC
- Maximum credit = $7,000 per employee
- Reported on Form 941-X for Quarter 1
- 2021 Quarter 2 ERC
- Maximum credit = $7,000 per employee
- Reported on Form 941-X for Quarter 2
- 2021 Quarter 3 ERC
- Maximum credit = $7,000 per employee
- Reported on Form 941-X for Quarter 3
How To Qualify for the Employee Retention Credit
Government Mandate Test
Businesses that experience fully or partially suspended operations due to orders from an appropriate governmental authority to limit commerce, travel, or group meetings due to COVID-19 can qualify for the ERC. The period that the employer pays qualified wages lasts as long as the government mandates are in effect.
Hotels and restaurants that had normal operations for parts of their business but experienced full or partial suspension of other operations (such as in-house dining vs. carry out) also may qualify for the ERC.
Examples of full or partial suspension of operations that should be considered include the following:
- A local or state order requiring employees to work from home
- A restriction on public gatherings (e.g., wedding receptions, other events)
- Capacity limitations imposed on public or private spaces requiring the cancellation of pre-planned conferences
- In house dining restrictions / spacing
Gross Receipts Test
In the first, second and third quarters of 2021, to the extent the gross receipts of the hotel or restaurant are more than 20% down from the gross receipts of the organization in the same calendar quarter of 2019, the employer will qualify as an Eligible Employer.
The gross receipts decline requirements for 2020 may be more difficult to meet due to the requirement to show a greater than 50% decline.
Examples of Gross Receipts:
- Includes proceeds from investments and grants
- Not reduced by the taxpayer’s adjusted basis in certain property used in a trade or business or capital assets sold
- Includes any income from investments
- Dividends
- Interest
- Rents
- Royalties and annuities
- Tax accounting method for income recognition applies
Enhanced Benefits for 2021
Total Full-Time Employees
In 2021, the threshold of full-time employees needed to qualify for the ERC was raised to 500 or fewer. Previously, for purposes of the 2020 ERC, only hotels and restaurants with 100 or fewer full-time employees (as measured, on average, in 2019) were entitled to the maximum benefits available under the ERC calculations.
Credit Rate
The percentage of qualified wages that can be applied to the ERC also increased for 2021.
- 2020 Credit: 50% of the qualified wages (including employer paid healthcare) paid to each employee. Qualified wages are limited to $10,000 per employee.
- 2021 Credits: For the first, second and third calendar quarters, 70% of the qualified wages (including employer paid healthcare) paid to each employee, per quarter. Qualified wages are limited to $10,000 per employee, per quarter.
Is ERC Available to PPP Loan and RRF Recipients?
Companies that received Paycheck Protection Program (“PPP”) loans also can qualify for the ERC. When the ERC was first authorized as part of the CARES Act, any organization that received funding under PPP was statutorily prohibited from claiming an ERC.
Later, in December 2020, when the ERC was extended and enhanced as part of the Consolidated Appropriations Act, the statutory prohibition against PPP recipients claiming ERC benefits was removed.
In August 2021, the IRS clarified that neither PPP loans nor Restaurant Revitalization Funds (“RRF”) should be included in the definition of gross receipts when determining eligibility.
Employee Retention Credit Application Requirements
The information that hotels and restaurant owners need to provide when applying for the ERC include the following:
- Number of full-time employees across the Controlled Group of Companies
- Full-Time Employees for 2019
- FTE is an employee that works 130+ hours per month.
- Gross Receipts
- Provide Gross Receipts for each of the qualifying quarters in 2019, 2020, and 2021
- Government Mandates
- Consider where you may have been affected by government orders (causing a full or partial shutdown)
- Collect all company locations where government orders may have caused partial shutdown
- PPP Loan Documents
- Provide all PPP loan forgiveness documentation to identify what expenses are being used for forgiveness
- Wage Data
- Wages for each employee, by pay period, for the period covered by the PPP loan(s)
- Copies of 941 payroll returns for 2020 and 2021
Conclusion
Hotel and restaurant owners should consider reviewing their eligibility for the ERC. Due to the substantial number of government orders limiting the normal activities in 2020 and 2021, many organizations are receiving substantial cash benefits, in addition to PPP benefits already received.
Learn more about the Employee Retention Credit and receive guidance to qualify for the credit by contacting your Cherry Bekaert advisor or Martin Karamon, Tax Principal and leader of Cherry Bekaert’s ERC Services Team.
