Why the Employee Retention Tax Credit is Too Good for the Restaurant
At the start of the pandemic, restaurants struggling from government shutdowns and social distancing orders eagerly took advantage of the Payment Protection Program (PPP) for much-needed cash flow. The first round of loans the restaurants were able to secure was two and a half times the average monthly payroll. The second round of PPP loans increased to three and a half times the average monthly payroll. In many situations, that amounted to three to five times a restaurant’s annual revenue.
The Employee Retention Tax Credit (ERTC) has proven equally lucrative, with eligibility periods ranging from March 2020 to mid-2021. Due to the extremely long eligibility period and the fact that eligible salaries receive a 50% or 70% credit. depending on the year, the credit can bring restaurants three to five times their annual income. And yet, according to our estimates, only a third of restaurateurs have taken advantage of the ERTC.
Here’s a better look at why turnout might be low and what restaurateurs can still do as COVID-19 continues to affect the hospitality industry.
New survey reveals lack of understanding
A recent study we conducted via Zogby Analytics found that six out of 10 business owners across all regions of the country did not take advantage of tax programs put in place during COVID-19. When asked why they hadn’t participated in incentive programs, nearly half of respondents chose “don’t know if our business is eligible” as their answer, and nearly one business owner business in five were “not sure” whether their business had benefited from the tax. incentives.
While it’s no secret that tax incentive programs can be daunting and complicated, the survey results point to significant missed opportunities, especially for restaurants, since the ERTC can provide the amount a restaurant could win over a period of three, four or even five years.
A revealing restaurant scenario
To help illustrate what’s at stake with restaurants taking advantage of the ERTC, consider the following example: A restaurant owner makes 2.7 million sales in 2021. After deducting food costs ($912,000) , labor ($900,000), rent ($135,000), miscellaneous ($621,000) and tax charges, the annual income is $132,000.
The restaurant receives two PPP loans in 2020 – the first for $210,000 and the second for $295,000. From March 2020 to early May 2020, the restaurant was subject to closure and then operated with capacity restrictions until June 2021, making it eligible to receive ERTC in the amount of 200 $000 for 2020 and $273,000 for 2021.
In summary, the PPP loans provided nearly four years of annual cash flow to the restaurant, and the ERTC program provided nearly another four years of annual cash flow. These economic benefits proved to be a significant lifeline for the restaurant owner as they faced rising food, salary and delivery costs.
How restaurants can still claim ERTC
Restaurants can become eligible for the ERTC in three ways (one or more must be met):
- Whether they have suffered a full or partial shutdown as a result of government orders (spacing and capacity restrictions usually satisfy this requirement)
- If they have experienced a significant drop in their gross receipts (50% in 2020 reduced to 20% in 2021)
- If they started a new trade or business after February 15, 2020
Even though the ERTC eligibility period has ended, restaurants can still claim this credit retroactively — they have three years from the date they filed their employment tax returns. That means many restaurants will have until 2024 to file a claim. For 2020, the ERTC is worth up to $5,000 per employee per year. In 2021, it was worth up to $7,000 per employee per quarter.
Conclusion for restaurateurs: Don’t miss the ERTC because you didn’t seek expert advice or use the proper assessment tool in your business analysis. The ERTC is something you earned and the credit is substantial, especially as COVID-19 continues to affect earnings.
Brent Johnson is co-founder of Clarus, a technology leader that enables companies to unlock the value of tax incentive programs.