For restaurants, one of the most beneficial COVID-19 tax relief measures made available by the U.S. government is the employee retention credit (ERC). For readers not familiar with the ERC, a general overview can be found in our January blog post.
The ERC is a fully refundable payroll tax credit equal to a percentage of wages paid by employers that meet certain ERC eligibility requirements. On August 4, 2021, the IRS confirmed its position that tips that are treated as wages for payroll tax reporting can be treated as wages eligible for the ERC in both 2020 and 2021 (provided all other requirements are met). This is a significant win for the restaurant industry.
In yet another victory for restaurants, a new safe harbor permits taxpayers to exclude certain items from the “gross receipts” used as one of the determinants for ERC eligibility. The three items that fall within the safe harbor are:
- The amount of the forgiveness of a Paycheck Protection Program (PPP) loan
- Shuttered Venue Operator Grants
- Restaurant Revitalization Grants
The exclusion of these items from the gross receipts used to determine eligibility for the ERC is expected to result in more restaurants that are eligible for the credit.
The following discusses the new safe harbor rule for determining gross receipts for ERC eligibility and its benefits to restaurants.
Who is Eligible for the ERC?
To claim the ERC in any given calendar quarter, restaurants must meet one of the following criteria during that quarter:
- The restaurants’ 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
- Their gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter.
The determination of whether a restaurant has experienced a significant decline in gross receipts varies according to the 2020 or 2021 quarter being tested. While the detailed computations used to figure a significant decline are beyond the scope of this article, the general premise is the same for all quarters: A taxpayer impacted by the pandemic in 2020 or 2021 would generally be expected to generate a lesser amount of gross receipts than it did pre-pandemic. Taxpayers that meet the gross receipts testing thresholds are eligible for the ERC irrespective of whether their operations are fully or partially suspended.
Many restaurants that were closed or partially suspended during 2020 and parts of 2021 may find it easy to prove eligibility for the ERC without determining whether they had a significant decline in gross receipts. Restaurant groups that operate across multiple jurisdictions, on the other hand, may find it excessively burdensome to substantiate numerous state, city and county closures and/or social distancing orders. These groups instead may find it easier to rely on the gross receipts test to determine ERC eligibility.
Gross Receipts Safe Harbor: Exclude PPP Forgiveness, certain Restaurant COVID Relief
For ERC eligibility purposes, “gross receipts” are defined by reference to Internal Revenue Code (IRC) Section 448(c) and include sales (net of returns and allowances), amounts received for services, income from investments and from incidental or outside sources regardless of whether that income is included in taxable income under IRC Section 61.
Neither PPP loan forgiveness, Shuttered Venue Operator Grants or Restaurant Revitalization Grants are included in federal taxable income. They could, however, be counted as gross receipts under a strict interpretation of IRC Section 448(c) and related regulations.
This possibility caused concern among taxpayers that government relief received in 2020 or 2021 in the form of forgivable PPP loans, Shuttered Venue Operator Grants or Restaurant Revitalization Grants would inadvertently cause an increase in gross receipts when compared to earlier quarters rather than the required gross receipts decrease. The IRS safe harbor provides much-needed clarity as it permits taxpayers to exclude these three items from gross receipts.
Under the gross receipts safe harbor, employers may exclude the amount of PPP forgiveness as well as Shuttered Venue Operator Grants or Restaurant Revitalization Grants from gross receipts when determining eligibility to claim the ERC for a given calendar quarter, so long the safe harbor is applied consistently.
An employer consistently applies the safe harbor by excluding permitted amounts for each calendar quarter in which gross receipts for that calendar quarter are relevant to determining ERC eligibility. In the case of multiple employers treated as a single employer under the aggregation rules, the safe harbor must be applied to all employers.
The gross receipts safe harbor aligns with the congressional intent that employers can participate in relief programs such as the PPP, Shuttered Venue Operator Grants or Restaurant Revitalization Grants and can also claim the ERC, so long as the same dollar of wages paid for with relief funds is not counted as wages eligible for the ERC.
This article originally appeared in BDO USA, LLP’s “Selections” Blog (August 13, 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com
Concannon Miller is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting and service firms with similar client service goals. Learn more here.