The COVID-19 pandemic hit hard in 2020 causing the hospitality industry to suffer. Major hotels either closed or operated at low occupancy levels throughout the pandemic forgoing the most significant economic hardships.
Other facilities faced closure early in the pandemic but were able to open with reduced capacity and social distancing procedures after the initial pandemic response.
Overall, the hospitality industry had to adapt to staff changes and the use of government relief programs such as the CARES (Coronavirus Aid, Relief and Economic Security) Act. Many hospitality employers applied for and received PPP (Paycheck Protection Program) loans to keep their businesses running amidst the pandemic.
Hospitality businesses were also encouraged to apply for ERTC (Employee Retention Tax Credit); however, at the time, the PPP loan recipients were ineligible for the ERC which limited the benefit of the ERC to the hospitality industry.
That changed in December 2020, when Congress passed the CAA (Consolidated Appropriations Act), both expanding ERC benefits to more employers retroactively in 2020 and extending benefits into the first two quarters of 2021.
The good news is: this relief is still available.
Even with businesses on the mend, employers in the hospitality and retail industry are still receiving this tax credit based on financial struggles during 2020 and the first three quarters of 2021.
Who is Eligible for the Employee Retention Tax Credit?
Companies qualify for the ERTC if they (1) had a substantial decline in quarterly revenue, or (2) were fully or partially shut down due to governmental orders, or (3) began a new trade or business and previously had less than $1 million in average annual revenue.
Businesses that began operations after February 2020 may qualify for specific startup rules that can provide up to $100,000 in refundable credits in 2021.
ERTC does not apply if the reduction in the activity of a business is merely due to economic conditions or voluntary closures.
What are the ERTC Benefits?
Your organization may qualify for four separately calculated ERTCs:
1. 2020 Maximum credit = $5,000 per employee
2. 2021 Quarters 1-3 Maximum credit = $7,000 per employee
An eye-opening restaurant scenario:
To help illustrate what’s at stake with businesses 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 will receive 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.
A hotel and restaurant scenario:
In another case, a hotel and restaurant owner discovered that they were eligible for the ERTC as a result of experiencing a partial shutdown due to government mandates within the restaurant along with a decline in gross receipts from the hotel.
These together maximized their ERTC. In total, the hotel & restaurant claimed $939K in PPP loans and $627K in ERTC through the second quarter of 2021.
For more information, download the details of this case study.
How To Qualify for the Employee Retention Tax Credit
Businesses that experienced fully or partially suspended operations due to orders from an appropriate governmental authority to limit commerce, travel, or group meetings due to COVID-19 can qualify for the ERTC. The period that the employer pays qualified wages lasts as long as the government mandates are in effect.
Hotels and restaurants that had normal operations for parts of their business but experienced full or partial suspension of other operations (such as in-house dining vs. carry out) also may qualify for the ERTC.
Gross Receipts Test
In the first, second, and third quarters of 2021, the hotel or restaurant gross receipts threshold was reduced from 50% for the 2020 ERTC to 20% for the 2021 ERTC.
Total Full-Time Employees
In 2021, the threshold of full-time employees needed to qualify for the ERC was raised to 500 or fewer. Previously, for purposes of the 2020 ERC, only hotels and restaurants with 100 or fewer full-time employees (as measured, on average, in 2019) were entitled to the maximum benefits available under the ERC calculations.
The percentage of qualified wages that can be applied to the ERTC also increased for 2021.
2020 Credit: 50% of the qualified wages (including employer-paid healthcare) paid to each employee. Qualified wages are limited to $10,000 per employee.
2021 Credits: For the first, second, and third calendar quarters, 70% of the qualified wages (including employer-paid healthcare) were paid to each employee, per quarter. Qualified wages are limited to $10,000 per employee, per quarter.
Overall, hotel and restaurant owners should check their eligibility for the ERTC. Due to the number of government orders limiting the normal activities in 2020 and 2021, many organizations are receiving big cash benefits, in addition to the PPP benefits they already received.
For more information about how Clarus Solutions can help your business claim this credit, we would love to talk to you!
About Clarus Solutions
Clarus Solutions transforms cash flow for businesses through employment tax credit opportunities. Founded by tax experts, Clarus believes in the power of tax credits for improving business finances and built its cloud-based platform to help more businesses unlock the full value of federal and state incentive programs. Backed by technology and unparalleled client service, Clarus collaborates with companies to help them understand their qualifications and delivers actionable insights for leveraging programs that impact hiring decisions and fundamentally improve the economics of their business.