Expense Segregation, Recordkeeping Are Critical

Few industries have been hit as hard economically by the COVID-19 crisis as the restaurant industry. But help is available in the form of several tax incentives and coronavirus relief programs to help restaurants survive the pandemic.

Maximizing your use of these government programs requires careful coordination and an understanding of the rules and how your individual circumstances come into play.

The cafeteria line of tax incentives and relief programs can be overwhelming, considering they all have their own rules, deadlines and benefits. To maximize the benefits of these programs, business owners must be sure to segregate and document expenses properly.

Following are the major incentives and programs available to the restaurant industry:

Restaurant Revitalization Fund (RRF)

Chief among the relief measures available to restaurant owners is the Restaurant Revitalization Fund (RRF) grant program, created by Congress in the American Rescue Plan Act, enacted in March of this year. The RRF is funded with $28.6 billion to distribute grants to eligible restaurants and food establishments, with a portion of the grants set aside for smaller restaurant companies and women-owned and minority-owned establishments.

You can create your account in the RRF Award Portal beginning April 30, 2021, with the program opening for applications on May 3, 2021.  With limited funds, it’s expected that the grants will quickly run out.  Swift action is required.

Paycheck Protection Program (PPP)

Perhaps the cornerstone of the government’s massive COVID-19 relief measures – at a total of nearly $1 trillion in funding – the PPP loan program was created by the Coronavirus Aid, Relieve and Economic Security (CARES) Act of 2020, and was expanded twice with new funding and extended into 2021. The purpose of PPP is to forestall or prevent layoffs by incentivizing employers to keep workers on the payroll during the COVID-19 crisis.

  • Who’s eligible? Generally, businesses and nonprofits with up to 500 employees, as well as self-employed individuals, sole proprietors and gig economy workers. Depending on which “draw” of the PPP loan program you apply for (there are three), you may benefit from additional eligibility guidelines that favor smaller businesses or those owned by women and/or minorities.
  • How much can I apply for? Maximum loan amounts vary with the different draws, but generally are calculated based on monthly payroll costs during a defined period of time.
  • How can I use the loan proceeds? Payroll costs including health benefits, mortgage interest, rent, utilities and debt interest.
  • Are the loan proceeds taxable? PPP loan proceeds are not taxable at the federal level even if forgiven. States have different rules about taxation of forgiven loans.
  • Advantages: The PPP loans are 100% forgivable if borrowers use the proceeds only for allowed expenses within the timeframe of the loan. Loans are obtained through local banks, which also handle forgiveness applications. Loans that are not forgiven are repayable over two years at 1% interest.
  • Caveats: Payroll expenses covered by a PPP loan cannot also be used to support the Employee Retention Tax Credit (below), so careful recordkeeping and expense segregation is critical.

Restaurant Revitalization Fund (RRF) grants

  • Who’s eligible? Owners of restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taproom-licensed tasting facilities or other places where food and drink are sold for immediate consumption. Applicants must have owned or operated no more than 20 locations as of March 13, 2020.
  • How much can I apply for? Up to $5 million for an individual applicant, or an aggregate $10 million for an affiliated restaurant group. Grants are calculated based on revenue losses comparing 2020 revenues with 2019 receipts, and are reduced by any amounts received under the Paycheck Protection Program (PPP).
  • How can I use the grant? Payroll and benefits, mortgage and rent payments, utilities, maintenance, supplies (including the cost of COVID-19-related personal protective equipment), food and beverage, among other costs.
  • Is the grant money taxable? Grant funds are not considered taxable income to the recipient by the federal government.
  • Advantages: The RRF is a grant program and, hence, funds received do not have to be paid back to the government.

Employee Retention Tax Credit (ERTC)

Also created by the CARES Act, the ERTC allows employers to take an immediate tax credit to help offset the costs of keeping workers on the payroll rather than laying them off as the COVID-19 pandemic continues. The credit can be used to offset both wages and the costs of health care benefits.

  • Who’s eligible? An employer that has experienced a 20% decline in quarterly receipts during 2020 or 2021, compared with the same quarter of 2019. Employers whose businesses were partially or fully shutdown due by government orders also may qualify.
  • How much does the ERTC cover? The ERTC rate is 70% of qualified wages per quarter, and qualified wages are capped at $10,000 per employee per quarter in 2021. For example, $10,000 of qualified wages multiplied by 70% or $7,000. During 2020, the rate was 50% and the cap was $5,000 per employee per quarter.
  • How do I claim the ERTC? Employers will report total qualified wages and related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers. The credit is taken against the employer’s share of Social Security tax.
  • Advantages: The ERTC is a refundable tax credit, meaning an employer may receive a refund for any excess under normal procedures.
  • Caveat: The ERTC and proceeds from a PPP loan may not be used to cover the same payroll costs. For many employers, this means claiming the ERTC for payroll costs over and above those paid for by the PPP. Again, careful costs segregation and recordkeeping is critical.

Work Opportunity Tax Credit (WOTC)

Created in 1977, the WOTC encourages employers to hire workers from traditionally disadvantaged groups. Learn more about the WOTC here. It is perhaps the most underutilized tax incentive available to the restaurant industry, in part because the process of qualifying employees and claiming the credit is unfamiliar to many business taxpayers. However, the potential tax savings make it worthwhile to consider the WOTC.

  • Who’s eligible? An employer that hires an employee who:
    • Has received 27 weeks of uninterrupted government unemployment assistance;
    • Was hired before January 1, 2021, and
    • Worked at least 120 hours during the year for which the WOTC is claimed. The benefit won’t be seen in the first year of the worker’s employment on your tax return, but you’ll see the credit the following year.
      • If the credit exceeds your business’ tax liability, you can carry the credit backward or forward. Carryback or carryforward is available to pass-through entities including S-corporations, partnerships, and LLCs. For some, the credit may pass through to a business owner’s personal tax returns. If that’s your case, and if the credit exceeds your personal tax liability, it may also be carried forward or backward.
  • How much does the WOTC cover? During a qualified employee’s first year of employment, the employer can recoup 25% of gross wages paid to an employee who worked between 120 and 400 hours, or 40% of wages paid to an employee who worked more than 400 hours. The maximum tax credit is $9,600 per qualified employee, and there is no limit on the number of qualified employees for whom you can take the WOTC in any given year.
  • How do I claim the WOTC? After a worker is hired, you must take part in a screening process to identify qualification. At this point a pre-screening notice is filed with the appropriate state workforce agency.
  • Advantages: With many job applicants having received unemployment assistance over the past year due to COVID-19, your chances of having workers who qualify for the WOTC are higher than normal. This program has also been extended until December 31, 2025.
  • Caveats: You may not ask job candidates if they have characteristics that would qualify them for the WOTC. You must stick with your regular hiring and interviewing protocols.

The FICA Tip Credit

  • What is it? Restaurant owners must pay FICA payroll taxes on the full compensation that their workers receive, including tips. However, at the end of the year, owners may receive a tax credit for the payroll taxes paid on the portion of their workers’ wages that is attributable to tips.
  • Who is eligible? Restaurant owners who pay at least their states’ minimum wage rates to employees.
  • How is the FICA Tip Credit calculated? If an employee’s non-tip wages exceed $5.15 per hour, the FICA tip credit equals the full amount of the employer’s share of FICA taxes paid on the employee’s tip wages. If an employee’s non-tip wages are less than $5.15 per hour, the credit equals the employer’s share of FICA taxes paid on the employee’s hourly tip wages after reducing that tip wage by the difference between the employee’s non-tip hourly wage and $5.15. The credit is available only with respect to FICA taxes paid on tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption, provided that the tipping of employees delivering or serving food or beverages by customers is customary.
  • How can I claim the FICA Tip Credit? The FICA tip credit can be requested when business tax returns are filed. It is reported on IRS Form 8846, which is sometimes called Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.
  • Advantages: Restaurant owners can recoup payroll taxes they have paid for their employees’ tips. For some restaurants, the tax savings can be substantial.

Taken together, these tax incentives and relief programs can enable some restaurant owners to recoup most or all their COVID-19-related losses over the past year. But maximizing these benefits is not a one-size-fits-all proposition. Each restaurant company has different circumstances, and coordinating these incentives requires careful expense segregation and analysis of which programs will be most beneficial.

For an expense segregation study or a discussion of how your restaurant can benefit from these programs, contact your Adams Brown advisor.