How it all started
The Employee Retention Tax Credit (ERTC) program was established when the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act was signed into law on March 27, 2020, to provide reimbursement of certain payroll expenses for businesses affected by the COVID-19 virus.
As originally stated in the CARES Act, the 2020 Employee Retention Credit was not available for Paycheck Protection Program (PPP) borrowers and required a loss in revenue that amounted to 50% or more for each calendar quarter of 2020 when compared to the respective revenues for the corresponding quarter in 2019, or were required to fully or partially suspend their businesses operations due to a government order, in order to qualify. These restrictive requirements prevented most businesses from being eligible to claim the credit.
The restaurant and hospitality industry scored a big win when The Consolidations Appropriations Act, 2021 (“CAA”) was signed into law on December 27, 2020, which allows PPP borrowers to apply for and receive the ERTC as long as the businesses meet certain criteria as originally stated in the CARES Act. This was a game changer and made the ERTC available to considerably more businesses.
The CAA updated the eligibility parameters whereby a business could become eligible if their gross receipts in a calendar quarter are less than 80% of the gross receipts in the same calendar quarter of 2019 (i.e., in Q1 2021, a business with gross receipts that have decreased more than 20% when compared to Q1 2019 would be eligible for the ERTC in Q1 2021). Further, the CAA allows for an option to satisfy this gross receipts test by looking at the immediately preceding quarter and comparing it to the corresponding quarter of 2019 (i.e., in Q1 2021, a business may have Q4 2020 gross receipts that decreased more than 20% when compared to Q4 2019, resulting in eligibility for Q1 2021). The CAA also provided that 2021 wages could be reimbursed for up to 70% of the first $10,000 paid to each employee for the first and second quarter of 2021, amounting to a maximum of $7,000 per employee per quarter for Q1 and Q2 2021.
Where we are now
The American Rescue Plan Act of 2021 (the "Act") extended the ERTC through December 31, 2021. Therefore, for 2021 the ERTC is available for all four quarters instead of only the first two quarters of 2021 allowed by the CAA. This brings the maximum ERTC amount up to $28,000 per employee for businesses that remain eligible for all of 2021. Furthermore, the Act modified the ERTC in order to enhance the credit for severely financially distressed businesses and certain recovery start up businesses. The ERTC still includes most of the provisions in the CAA, as stated above. Businesses that have experienced at least a 90% decline in gross receipts compared to the same quarter in 2019 may take all wages paid during those quarters in order to calculate the ERTC beginning July 1, 2021. In addition, recovery start-up businesses (businesses that began operations after February 15, 2020 and have average annual revenues up to $1,000,000) may be eligible for a credit up to $50,000 per calendar quarter.
It is important to note that eligible businesses cannot take the ERTC on the same payroll paid with Restaurant Revitalization Fund (RRF) grant proceeds or wages used in applying for PPP forgiveness. The RRF is discussed in Part 1 of this article.
Any ERTC that businesses receive are not taxable, but the wages that were paid that qualified for the credit will not be tax-deductible. For example, an ERTC received in 2021 may not be taxable, but the payroll paid to receive the credit will not be tax-deductible on the income tax return in which those wages were incurred.
The guidelines surrounding federal COVID-19 relief programs frequently change and are complex. If you have any questions relating to how the extension or modifications will affect your restaurant business’s claiming the ERTC, please reach out to a member of our Restaurant and Hospitality Practice.