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The spread of COVID-19 has had devastating effects on communities and industries around the world, especially restaurants.
As restaurant sales plummeted nearly 80% in a month because of COVID-19, restaurants pivoted operations to focus on takeout and online ordering. But for many, that understandably hasn’t been enough, and frustrated business owners are hoping for relief in any form, including a restaurant tax credit.
On March 27, 2020, the US federal government passed the stimulus bill called the “Coronavirus Aid, Relief, and Economic Security Act”, or the CARES Act, with the intention of addressing the economic impact of COVID-19. The CARES Act includes measures for individuals and businesses that were affected by the social distancing and shelter-in-place mandates that have been enforced on a state and national level. It also includes certain tax credits that, if eligible, may assist your restaurant in navigating the difficult economic impact resulting from this pandemic.
This article covers a brief overview of what’s included, what’s not, and how to apply for the Employee Retention Credit.
This article was written in April 2020.
What Is the Employee Retention Tax Credit?
The Employee Retention Credit, is a beneficial provision of the CARES Act, nestled within the COVID-19 stimulus bill. Specifically, the Employee Retention Credit is designed to aid and encourage employers into keeping employees on their company’s payroll, and mitigating the financial loss and burden imposed on employers from the effects of COVID-19.
The IRS explains that the Employee Retention Credit is a fully refundable tax credit for certain businesses where eligible employers may claim a credit amount equal to up to 50 percent of qualified wages (including allocable qualified health plan expenses) paid to their employees.
Let's unpack that.
What are the terms of the tax credit?
In short, employers can get a 50% tax credit for the first $10,000 of qualified wages, per employee. The maximum amount of qualified wages cannot exceed $10,000 per employee, and the maximum credit per employee cannot exceed $5,000.
Other terms of the credit:
Qualified wages and compensation consist of the salary, hourly wage, tips, and etc., that an employer generally pays to their employees for work performed.
The wages must be paid after March 12, 2020, and before January 1, 2021.
The value of any health plan benefits can also be included in determining the amount of qualified wages.
If your restaurant employed fewer than 100 employees in 2019, it can receive credit for any employees — regardless of whether the employee has — or has not — been able to work for your restaurant during the COVID-19 crisis.
If your restaurant has employed more than 100 employees in 2019, it can receive credit only for employees who unable to provide services for the business due to the COVID-19 crisis.
Who is eligible for the credit?
The eligibility criteria around the Employee Retention Credit is broad: the credit can be applied to almost all types of businesses, including restaurants of all sizes. Eligibility only comes into question for state and local government entities, and any business who receives a SBA loan.
Specifically, a business must:
Have been in business during 2020, and have been impacted negatively by COVID-19 through full or partial municipal shut-down orders; or
In a year-over-year (2019/2020) calendar-quarter comparison -- starting with the first quarter of 2020 -- have experienced less than a 50% reduction in gross receipts as compared to gross receipts from the first quarter of 2019, until the end of any applicable subsequent calendar quarter comparisons where an employer’s gross receipts are greater than 80% in comparison to the same calendar quarter in the prior year.
How Does the Tax Credit Help Your Restaurant?
Here are some answers to frequently asked questions:
What kinds of taxes does the credit apply toward?
For restaurants, the credit applies to any Social Security payroll taxes and Railroad Retirement Act applicable taxes.
How do you receive the tax credit?
In order to receive the credit, restaurants should report the total qualifying wages and eligible credit on their federal employment tax returns, which is Form 941, Employer's Quarterly Federal Tax Return.
Prior to receiving the credit, restaurants can immediately fund the eligible credit that is applicable to the qualifying wages by reducing the federal employment tax deposits.
Additionally, restaurants can also request an advance of the credit from the IRS by submitting a Form 7200.
Here’s how to claim the Coronavirus Tax Credit.
Restaurants will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941: Employer's Quarterly Federal Tax Return. (Form 941 is generally used to report income and FICA taxes (Social Security and Medicare payroll taxes) that are withheld by the employer from an employee’s wages, in addition to the employer’s portion of FICA taxes.
Additional CARES Act/Coronavirus Tax Credit Resources
You can find the CARES Act here, but below are some helpful resources in understanding how your business might be affected by the stimulus package.
Rally for Restaurants has a brief summary of the CARES Act, including a breakdown of the Paycheck Protection Program, changes to Economic Injury Disaster Loans, a Paycheck Protection Loan Calculator, and several other helpful, customizable expense calculating templates.
You can learn more about how to apply for an PPL and EIDL on the SBA website. To find an eligible lender for a PPL, see here. If you already have an SBA loan, you can get in touch with your lender to ask about PPLs and see if you qualify.
For more options for non-governmental financial support, see this list of national and regional resources and relief funds.