Significant Enhancements to the Employee Retention Tax Credit (ERTC): Maximizing the ERTC in 2020 and 2021

This article was originally posted on December 15, 2020 under the title Facing a New Round of Dining Shutdowns? It’s Not Too Late to Take Advantage of the Employee Retention Credit. It has been updated to reflect changes to the ERTC contained in the Consolidated Appropriations Act, 2021 which was signed into law on December 27, 2020. Throughout this article, the Consolidated Appropriations Act, 2021 will be referred to as the “Relief Act” or “Act”. 
 
The restaurant industry was one of the earliest casualties of the coronavirus pandemic, with many states and cities imposing mandatory shutdowns as early as March of 2020. Shutdowns were often replaced with social distancing restrictions such as patio dining only and/or 50% occupancy limits. The recent surge in the coronavirus pandemic continues to wreak havoc on the restaurant industry. More and more states and localities are again imposing mandatory shutdowns of restaurant dining spaces, throwing salt in the wounds of an industry already facing substantial economic hardship and creating another obstacle to their ability to rebound.
 
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a variety of economic relief measures applicable to the restaurant industry, including the Paycheck Protection Program (PPP) and the Employee Retention Tax Credit (ERTC). Under the CARES Act, businesses could take advantage of either the PPP or the ERTC, but not both. In welcome news for restaurants, the Relief Act retroactively eliminates this limitation and extends and enhances the ERTC through the first two quarters of 2021. 
 
The ERTC is one of the most beneficial provisions in the new law relevant to restaurants. If you did not consider the ERTC in 2020 (or were not eligible to consider the ERTC because you took a PPP loan), the retroactive ability to benefit from both PPP loans and the ERTC is a powerful reason to consider the ERTC for 2020.  Looking ahead to 2021, the enhanced amount of the credit for wages paid during the first two quarters of 2021 provides yet another strong reason to consider the ERTC.
 
Quick Bites:
 
What is it? The ERTC is a fully refundable payroll tax credit designed to encourage businesses to retain and compensate employees during periods in which businesses are not fully operational. 

Who is eligible for the ERTC? To claim the ERTC in any given calendar quarter, restaurants must meet one of the following criteria during that quarter:

Their operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19; or

They experienced a significant decline in gross receipts during the calendar quarter compared to 2019.

This article will assume eligibility based on full or partial suspensions.

The IRS’ Frequently Asked Questions contain the following helpful examples describing partial suspensions:
 
Example 1: Employer F, a restaurant business, must close its restaurant to on-site dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. Employer F is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. Employer F'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.
 
Example 2: Same facts as Example 1, except that two months later, under a subsequent governmental order, Employer F 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 Employer F is allowed to operate only its outdoor sit-down and carry-out service in accordance with the order, Employer F'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. The following month, under a further governmental order, Employer F 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 Employer F's indoor dining service capacity and has more than a nominal effect on its business operations. During this period, Employer F'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.
 
Can you claim the ERTC if you receive a PPP loan? Yes! One of the most favorable provisions in the new law allows taxpayers to both receive PPP loans and claim the ERTC. This overlap was not permitted when the CARES Act was originally enacted, and restaurants in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERTC. Importantly, the new law makes the ability to claim the ERTC and receive PPP loans retroactive to March 12, 2020.  As a result, restaurants that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERTC credits for 2020 and 2021. 

What wages qualify for the ERTC? The answer depends on a restaurant’s status as a “large employer” (see below).  Eligible restaurants that are large employers can only claim the ERTC for wages paid to employees for the time they are not providing services. This aligns with the purpose of the ERTC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational. 

Smaller eligible restaurants, on the other hand, can claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine large employer status to an employee count of more than 500 (previously more than 100). This favorable change will broaden the number of eligible restaurants that can claim the ERTC for all wages paid to employees, including wages paid to employees who are providing services.  Importantly, qualified healthcare expenses count as wages. 


How is the determination of Large Employer status made? Large Employer status is determined by counting the average number of full-time employees employed during 2019.

For this purpose, “full- time employee” means 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.  This is the same definition used for purposes of the Affordable Care Act. Importantly, aggregation rules apply when determining the number of full-time employees.  In general, 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. 

Restaurants that operated for the entire 2019 year compute the average number of full-time employees employed during 2019 by following the following steps:

Step 1: Count the number of full-time employees in each calendar month in 2019.  Include only those employees that worked an average of at least 30 hours per week or 130 hours in the month.

Step 2: Add up each month’s employee count from Step 1 and divide by 12.

Special rules apply to restaurants that began operations in 2019 or 2020.*

*Restaurants that started business operations during 2019 determine the number of full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2019 in which the restaurant operated its business and dividing by that number of months.

Restaurants that started business operations during 2020 determine the number of full-time employees by taking the sum of the number of full-time employees in each full calendar month in 2020 in which the restaurant operated its business and dividing by that number of months, consistent with the approach discussed above for employers that began business operations during 2019.


Can the same wages be used for the computation of both the ERTC and the amount of PPP loan forgiveness?  No. Simply put, there is no double dipping. Wages used to claim the ERTC cannot also be counted as “payroll costs” for purposes of determining the amount of PPP loan forgiveness, and restaurants that want to benefit from the ERTC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent a restaurant does not have sufficient wages, strategic planning will be needed in order to generate maximum benefits.
 
Highlights of ERTC changes include:
  Prior Law:  3/13/20 – 12/31/20 New Law:  3/13/20 – 12/31/20 New Law:  1/1/21-6/30/21
Interplay with PPP loan No ERTC if received a PPP loan Taxpayers that receive a PPP loan can claim the ERTC, but double dipping is not allowed
Maximum Creditable Wages per Employee $10,000 per year $10,000 per year $10,000 per quarter
Maximum Credit 50% of eligible wages, up to $5,000 per employee 50% of eligible wages, up to $5,000 per employee* 70% of eligible wages, up to $14,000 per employee*
Threshold to be considered a “Large Employer” (based on average FTE in 2019, and considering aggregation rules) More than
100
More than 100 More than 500
 
* Potential total credit under the new law = $19,000 over 2020 and 2021.
 
BDO’s team of experts can help you compute and maximize your ERTC. Don’t hesitate to reach out to Lisa Haffer for more information.

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