With Randy Crabtree
Randy continues his analysis of the Employee Retention Credit on Episode 47 of The Unique CPA. His focus this time is on the restaurant industry, arguably the hardest hit industry in the country due to Covid. His deep dive into various opportunities tax preparers have to help their restaurant clients will be useful to anyone looking to maximize benefits to those clients.
Today, we’re going to continue on the series that we began last episode, episode 46, on the Employee Retention Credit. If you want to get deep into the Employee Retention Credit in general, go back and listen to 46 before we move on with this episode today, but I will give you a quick recap.
So we’re going to do the Employee Retention Credit today; we’re going to go industry specific. We’re going to do this for the next few episodes: we will discuss service industry, we will discuss non-profit. But today I think we’re going to concentrate on what I feel was the hardest hit industry—or at least one of the top three hardest hit industries by the pandemic—which was the restaurant industry.
I did a webinar for the National Restaurant Association last month, And we got great feedback from that. We had a lot of people reaching out. From that, what I understand is that there’s still a lot of confusion in the restaurant industry about how they qualify for the Employee Retention Credit. So what I do want to do is expand on the restaurant industry specifically today, for the Employee Retention Credit. But first, a quick background.
So the Employee Retention Credit—and again, listen back to episode 46 for a deeper definition of this—but you can qualify for the Employee Retention Credit one of two ways: either have a drop in revenue, and that drop changes based on the year 2020 or the year ‘21… But have a significant drop in revenue. Or—and this is important because I say this every time I talk about it, but there is confusion—companies say “I don’t qualify because I didn’t have a drop in revenue.” That is not the case. Significant drop in revenue will qualify you, but probably more businesses qualify under suspension rules. And suspension rules say, “Did I have a restriction put on my business by a government entity?” and the restaurant industry had significant restrictions put on them by a government entity, and so therefore, many restaurants will qualify under both—either the drop in revenue and the restrictions—but you don’t have to do both. So again, listen back to episode 46 for more on that, but that’s how you qualify.
Now the restaurant industry in general significantly hit I think numbers are there was a drop in $240 billion of revenue in the industry in general in the year 2020. At the peak of the pandemic, I think there was 8 million jobs lost. At the end of the year, there was still 3.1 million jobs lost. Over 100,000 restaurants were either temporarily or permanently closed at the end of 2020. Very hard hit industry. So it should be an extremely popular industry for using the Employee Retention Credit. Again, though, there’s still confusion—I hear too many tax preparers telling me that their clients don’t qualify, or they’re saying their clients don’t think they qualify—and asking me to help identify the ways that they do qualify. So that’s what we’re gonna try to do a little bit today.
Before we get into the restaurant-specific, just as a recap, the value of the employee retention can be significant. In the year 2020, we can get up to a 50% credit of the first $10,000 of wages per employee for the year, for the term that the business was affected—the term the restaurant was affected. So that could be up to $5,000 of credit available per employee.
In the year 21. That went up to a 70% credit and it’s now quarterly. So it’s 70% of the first $10,000 of wages per employee per quarter. So up to $7,000 per employee per quarter. In that scenario, we can have up to 5,000 last year and up to $28,000 this year, per employee—up to $33,000 of credit per employee. And it’s a refundable credit. It’s a credit on the 941, but it’s refundable. So that’s the significant excitement that surrounds this, ‘cause we’re putting money back into businesses. And as tax preparers, as CPAs, as a tax preparer, that’s your responsibility to identify these areas where you can help your clients put money back in their business—in general, it’s always been your responsibility. It is an extremely important responsibility today with what’s going on in the restaurant industry the last year and a half. And so that’s what makes this such an exciting, valuable area for businesses.
The decline in gross receipts is fairly straightforward: In the year 2020, if we can show a 50% drop in revenue in any quarter in 2020 when we compare that same quarter in ‘19, that’s the Safe Harbor rule we met, and that restaurant qualifies. If in the year 21, there’s a 20% drop in revenue in any quarter in ‘21, compared to ‘19 again, that’s the Safe Harbor rule, that business qualifies. So that’s the math.
Some restaurants will do that—some restaurants will make it in the 50%—although a lot of them pivoted, a lot of them changed their operations, so the revenue did not get to that 50% level. But in the year ‘21, we’ve definitely seen a lot of restaurants qualify in that 20% drop. But that’s the Safe Harbor only. More often, what we’re going to do is look at restaurants and see how they were affected by a government restriction.
And so what were government restrictions put in place for restaurants? Well, the restaurant industry—restaurant and bars together—were probably more impacted by government restrictions than any other industry. You can throw theaters in there, you could throw gyms in there as well, and there’s some other industries. But restaurants are just probably the biggest segment of industry that has been affected. And so they had restrictions put on them.
The IRS actually specifically addresses the restaurant industry in FAQ 34. They put out the, you know, frequently asked questions list and how you qualify. And in 34, they actually say that “if a government order requires an employer to close its workplace for a certain purpose, but the workplace will remain in operation for limited purposes, they are considered to have a suspension.” And so how does that equate to restaurants? Well, most restaurants around the country at some point in time—for at least a period of time—were closed to indoor dining. They may have had, you know, delivery and pickup. In fact, the FAQ actually goes into it and says “Okay, they were closed for dining in general, but they were open for delivery and pick up—because they were closed for indoor dining, they were shut down, they qualify under the suspension rules,” under I like to say, the restriction rules.
They go on to say “Okay, at some point in time”—and these restrictions are evolving, obviously—they say “At some point in time, they could have outdoor dining. Okay, they were still restricted from indoor dining, even though they have outdoor dining, now they have delivery, now they have pickup, they’re still under restriction, they qualify for the Employee Retention Credit. Further down the road, they were able to have some indoor dining—a restriction, maybe it was 50% indoor dining—well, they had 50% indoor, they had full outdoor, they had pickup, they had delivery, they still qualify for the Employee Retention Credit.” This is the IRS’s interpretation directly in FAQ 34. Even further, then: “The restrictions were lifted, and now they can have full indoor dining, but they had to have six feet between tables. If that six feet in all intents and purposes still restricted their capacity, they were still affected.”
So under all those scenarios—in the final scenario, they had full indoor dining, other than, you know, spacing requirements, six feet between tables—they had full outdoor, they had pickup, they had delivery. In the IRS’s eyes, they’re still qualified. So that can give you an idea of how a restaurant in general can qualify. These restrictions were in place, and these restrictions evolved over time, and this business, this restaurant qualifies under all those scenarios. Again, that’s directly from IRS’s FAQ number 34.
So when we look at this, in general, for a restaurant, you know, if we have a drop in revenue for a restaurant, that qualifies Safe Harbor Rule, we qualify for that entire quarter we have the drop in revenue. If we’re qualified under the suspension rules, then we have to determine the term of the suspension, and that’s the term that that restaurant qualifies. So for many restaurants, those suspension rules went well into ‘21. I mean, they started in mid-March of ‘20, and a lot of places didn’t have full capacity indoors until June of ‘21. And unfortunately, that could get restricted again, so we’ll have to watch that and see what’s going to happen in the future here. But that restaurant’s going to qualify, most likely, for a five quarter period—again, for the restriction rules, we look at the term of the suspension. So we look and see how long that has been affected.
Now, I obviously want to be able to quantify that restriction in some way as well. You know, “Here is a suspension that has affected us”—I want to be able to show that there was an effect. It doesn’t necessarily mean there’s a drop in revenue. Like we said, you could have pivoted, you could have changed, you could have went all delivery, you know, delivery’s fine, but you probably have extra expenses. You probably used outside services for delivery. Or you even pivoted with your own employees and you turned them into delivery personnel rather than waiters and waitresses and bartenders—still qualifies. Still have that. Maybe we have additional expenses, maybe revenue stayed up—that’s fine, revenue can stay up, but if we were restricted from being able to conduct that restaurant business or that bar business as we would have, pre-pandemic, we are still affected.
So we can look at financial statements, we can see an increase maybe in expense here, even without the drop in revenue. Maybe we have a drive-thru, and drive-thru business went through the roof. But we were restricted for indoor dining—and if indoor dining was more than a nominal portion of our business in 2019, that’s a secondary Safe Harbor Rule. If we look at your 2019 financial statements, and they can be broken out into segments of revenue, or segments of hours worked by employees, and we can determine that a more than 10% of your 2019 hours worked or revenue segment of your business was affected by suspension—in this example, indoor dining was more than 10% of our revenue in 2019—even though we have a drive-thru, and that more than made up for the lack of indoor dining, we still qualify, because we meet this Secondary Safe Harbor that shows that we have had a suspension to more than a nominal portion of our 2019 business.
We can look further in restaurants. We can start to analyze our ticket count, average ticket count, review the POS system for types of sales we’re doing, maybe we introduced new products and services, maybe you started doing virtual tastings online, virtual menu selection. You generated additional revenue? That doesn’t matter, again. The fact that we had a more than nominal portion of our business affected by suspension is really all we want to look at to determine if we qualify.
IRS FAQ 30 actually talks about putting a restriction on the business, you know—“Was there a limitation on how often you can turn over a table? How often you can use a private room? Were your hours reduced? Was your capacity reduced? Did you have social distancing requirements? Did you have sanitation requirements that restricted your ability to turn over a table timely?” All these things for restaurants, at some level, were in place for most businesses around the country. But not only directly—direct restrictions, direct suspensions, affected the restaurant business—but indirectly. There’s another FAQ that talks about “Were our suppliers affected? Did we have a food supplier that was somewhere around the country affected by a government suspension, a government restriction, and that trickled down to us and that restricted our ability to continue to operate our business.” And not necessarily food, other services’ supplies that you needed in your restaurant business—were those businesses affected, that again, trickled down to you as a restaurant or bar owner? If so, you can qualify for the Employee Retention Credit.
Now one other thing I want to talk about restaurants in general: There’s an aggregation rule. Many restaurant owners own multiple locations. Often those locations are held in a different, let’s say, LLC—some kind of entity. But let’s assume it’s an LLC. If we have common ownership—and I’m not going to go into the definition of that now—but if we have common ownership between these businesses, and they meet the requirements for aggregation, then we have to look at these businesses as one.
And the interesting thing with that is, if let’s assume we have a restaurant in one area that had significant restrictions put on it. And then we have four other restaurants in areas where there weren’t as many restrictions put in place. Well the aggregation rules say, if we have a more than nominal portion of our overall business, aggregated business—five restaurants all aggregated together, and let’s say the one that was affected was more than 10% of our 2019 revenue—now, this one that was affected actually brings in these other four as well. And so there could be a positive effect from these aggregation rules where we’re bringing employees from businesses that weren’t as greatly affected, but now we get to take all these businesses in. Or, we look at this aggregation of which business was affected the longest—you know, some of them, let’s assume, by July of 2020, had no restrictions put on them. But we had one of our five restaurants in an area that had restrictions all the way till June ‘21. That one that we had all the restrictions all the way till June ‘21 is most likely going to bring in those other four that opened up fully in July of ‘20. So aggregation rules are very important—we can look at this to see if different restaurants were pulled in.
A couple more things on restaurants in general: Tips. There’s been for employees, you know, the Employee Retention Credit’s based on wages: first $10,000 of wages per employee. Wages include what it sounds like. It’s salaries and wages, bonuses can be included. Health insurance cost is also included. I’ve seen where there’s been some controversy—I don’t know if that’s the right word—but there’s been some difference of opinion on whether tips are included for the Employee Retention Credit, because technically the employer is not paying those tips. You’re not paying those tips, but you’re paying the Social Security taxes on those tips. Tips are included. I had a big back and forth with an attorney that we have on retainer that is very actively involved in the Employee Retention Credit, and his opinion, and my opinion as well, is that tips are included. And so based on the code section that the legislation points to, there’s nothing in there that eliminates tips in my mind. So we are including tips and wages for the Employee Retention Credit.
The one thing with eligible wages to be aware of is anybody that’s more than 50% owner, unfortunately appears to not be included in the Employee Retention Credit. I honestly personally don’t see where that is in the code. But again, talking with our lawyer, they are saying that the intent was that anybody more than 50% owner of the business shall be not included in the Employee Retention Credit, and that includes anybody related to that more than 50% owner. If you’re a 50% owner or less, you are included in the Employee Retention Credit calculation.
Then one last thing I want to touch on with restaurants and the Employee Retention Credit: So when this Employee Retention Credit was originally defined, it was defined in the CARES Act. The CARES Act also defined the PPP loans. In the CARES Act, they said, if you took a PPP loan, you could not also do the Employee Retention Credit. Well, that changed, and so now you can do both, and you can do it retroactively back to March of last year.
The problem that comes in is that some businesses want to get rid of that PPP loan as quick as possible. So they want to use all those wages they received, after they got their PPP loan, to eliminate that loan as quick as possible. The problem with that is, it’s going to affect your Employee Retention Credit. It’s going to reduce your credit. We can’t use the same dollars that are used for forgiveness, as we want to use for the Employee Retention Credit. So it gives us more flexibility—it gives you more flexibility as the restaurant owner or as the tax preparer—to maximize the Employee Retention Credit, if we extend that forgiveness period for 24 weeks. Now for PPP 1, you know, we probably got forgiveness on most of those, if not all of those at this point. We have to live with whatever was used for forgiveness. In the year 2020, it’s easier to maximize the Employee Retention Credit, because we have, for most restaurants, the entire let’s say nine and a half month period to try to maximize each employee up to $10,000 of wages, which is the max wages we can use for the year. For the year ‘21, and PPP, it’s going to get a lot more important to again, extend that forgiveness period for 24 weeks, because not only do we need to try to maximize each employee up to $10,000 for the ERC, we need to try to do that quarterly. So by extending that forgiveness period, it gives us more flexibility to allocate wages between the quarterly periods, to PPP and ERC, depending on how much an employee was paid. Obviously, if they were paid more than 10,000 in a quarter, we’re gonna use all that excess for forgiveness. If they were paid less than 10,000 a quarter, we want to try to use all that wages for ERC, but then we have to make sure there’s still enough wages overall for forgiveness left in the additional quarters or the additional employees that have excess wages.
So it’s just a matter of doing a whole analysis to make sure we can optimize this restaurant’s, one, make sure it’s full forgiveness—that’s number one—and then two, how high can we get the Employee Retention Credit without affecting forgiveness. So that’s going to be the last thing that we need to be concerned about with the Employee Retention Credit for restaurants, very important aspect.
And then once we have done all that, once we’ve figured out what the benefit is, the credit is claimed on—most likely, you’re going to claim it on the 941x, an amended payroll tax return. File that amended payroll tax return, again, the amount of the credit in almost every situation will be the amount of the refund that’s coming back to that restaurant. If the restaurant had, for some reason, reduced their payroll tax deposits, well then obviously that’ll eat into the refund, but for most of our clients they’ll have not reduced any payroll tax deposit, and so when we file the 941x, the amount of the credit is coming back as a refund.
In the American Rescue Plan, there was one significant change that occurred. In addition to extending the Employee Retention Credit, it also extended the statute of limitations for audit. And so normally a 941 is up for audit for three years. The American Rescue Plan extended that for another two years. So you can—the IRS can look back at a 941 that was filed with an ERC on it for five years. So it’s going to be extremely important to, you know, obviously, it always is in all situations, but make sure you fully document how this business qualified—and then make sure that you have obviously done the calculations correct when you’re—and, even the filing’s correct—when you’re looking to get this refund for this business.
Now, this is just something that we do—we do all the time. We work with tax preparers around the country on the Employee Retention Credit. So we have programs in place to work with the tax preparer as well. If you want more information on that, you can reach out to us by going to our website, which is Tri-Merit.com. You can go specifically to Tri-Merit.com/ERC, which will go right to Employee Retention Credit information. You can also go to “About Us,” meet the team—you can get some contact information for myself or other people as well, and reach out if you have any questions on this, or if you have any restaurants that you feel will qualify—businesses in general, especially restaurants—I don’t think you can eliminate any of these without having a further discussion on it. Because every business out there has its unique facts and circumstances, on how they were affected by this pandemic. What restrictions were put in place for them? What did they do to get around that? How did they change? But overall, we have the opportunity to look at those changes, to look at those effects, and see if it was enough for this business to qualify for the Employee Retention Credit. And if it does, there’s significant dollars that you as a tax preparer can bring to your clients to help them get through what this pandemic has done to them.Thank you for joining us today. And you can find all the links and show notes for today’s episode as well as more about Tri-Merit at TheUniqueCPA.com. Remember to subscribe and join us for our next episode where we’ll be going beyond compliance, into forging new pathways of delivering value to clients, diversifying your revenue streams, and leading edge management techniques and styles.
About the Guest
Meet the Host
Randy Crabtree, CPA
Randy Crabtree, co-founder and partner of Tri-Merit Specialty Tax Professionals, is a widely followed author, lecturer and podcast host for the accounting profession.
Since 2019, he has hosted the bi-weekly “The Unique CPA,” podcast, which ranks among the world’s 10% most popular programs (Source: Listen Score). You can find articles from Randy in Accounting Today’s Voices column, the AICPA Tax Adviser (Tax-saving opportunities for the housing and construction industries) and he is a regular presenter at conferences and virtual training events hosted by CPAmerica, Prime Global, Leading Edge Alliance (LEA), Allinial Global and several state CPA societies. Crabtree also provides continuing professional education to top 100 CPA firms across the country.
Schaumberg, Illinois-based Tri-Merit is a niche professional services firm that specializes in helping CPAs and their clients benefit from R&D tax credits, cost segregation, the energy efficient commercial buildings deduction (179D), the energy efficient home credit (45L) and the employee retention credit (ERC).
Prior to joining Tri-Merit, Crabtree was managing partner of a CPA firm in the greater Chicago area. He has more than 30 years of public accounting and tax consulting experience in a wide variety of industries, and has worked closely with top executives to help them optimize their tax planning strategies.