Early on in the pandemic, restaurants struggling in the wake of government shut-downs and social distancing orders eagerly took advantage of the Payment Protection Program (PPP) for much-needed cash flow. The first round of loans that restaurants were able to obtain were 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, this equated to three to five times a restaurant’s annual earnings.
The Employee Retention Tax Credit (ERTC) has proven to be just as lucrative, with eligibility periods stretching from March 2020 through mid 2021. Because of the exceedingly long eligibility period and the fact that eligible wages receive a credit of either 50 percent or 70 percent depending on the year, the credit can provide restaurants with three to five times their annual earnings. And yet, according to our estimations, only one-third of restaurant owners have taken advantage of the ERTC.
Here is a better look at why participation might be low and what restaurant operators can still do as COVID-19 continues to affect the hospitality industry.
New survey reveals lack of understanding
A recent study we conducted through Zogby Analytics found that six out of 10 business owners in all regions of the country have not leveraged tax programs implemented during COVID-19. When asked why they haven't participated in incentive programs, almost half surveyed chose “don't know if our company qualifies'' as their response, and nearly one in five business owners were “not sure” if their firm took advantage of tax incentives.
While it's no secret that tax incentive programs can be daunting and complicated, the survey results indicate substantial missed opportunities, especially for restaurants, since the ERTC can provide the amount a restaurant could make in a three, four, or even five-year period.
An eye-opening restaurant scenario
To help illustrate what's at stake with restaurants that take advantage of the ERTC, consider the following example: A restaurant owner makes 2.7 million in sales in 2021. After deducting costs for food ($912,000), labor ($900,000), rent ($135,000), miscellaneous ($621,000) and tax expenses, 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 through early May 2020, the restaurant was subject to closure and then operated with capacity restrictions through June 2021, making them eligible to receive the ERTC in the amounts of $200,000 for 2020 and $273,000 for 2021.
In summary, the PPP loans provided almost four years’ worth of annual cash flow to the restaurant and the ERTC program provided almost another four years’ worth of annual cash flow. These economic benefits proved to be a significant lifeline to the restaurant owner as they dealt with rising costs of food, wages and delivery.
How restaurants can still claim the ERTC
There are three ways that restaurants can become eligible for the ERTC (one or more must be met):
- If they experienced a full or partial shutdown as a result of government orders (spacing and capacity restrictions usually satisfy this requirement)
- If they experienced a significant decline in 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 eligibility period for ERTC has ended, restaurants can still retroactively claim this credit — they have three years from the date of filing of their employment tax returns. This means many restaurants will have until sometime in 2024 to make 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.
Bottom line for restaurant owners: Don’t miss out on the ERTC because you didn’t seek an expert’s opinion or use the appropriate assessment tool in your firm’s analysis. The ERTC is something you have earned and the credit is substantial, especially as COVID-19 continues to affect profits.
Brent Johnson is cofounder of Clarus, a leader in technology that enables businesses to unlock the value of tax incentive programs.