There is a lot of talk about the Employee Retention Credit (ERC) for restaurants, with aggressive advertising and spamming from companies looking to claim them on behalf of restaurant owners, and a lot of misinformation circulating through word of mouth. As professionals in this space, we want to cut through the noise to emphasize five things every restaurant owner should know about this tax credit.

1. The Credit is a Game Changer

The Employee Retention Credit (ERC) is for employers who experienced difficulties in 2020 and 2021 as a result of COVID shutdown orders and related economic disruptions. Any employer who has more than five employees and experienced any kind of hardship or disruption during the pandemic should look into eligibility for this historic tax credit. The potential upside of such a large credit (often $100k+) makes it a game changer for restaurant owners, and we have seen many cases where ERC money has been crucial to expanding or maintaining operations in uncertain times.

2. You Almost Certainly Qualify  

Although shutdown orders and other restrictions on restaurants varied considerably between states, the vast majority of restaurants with indoor dining experienced state-mandated restrictions on their normal operations that would qualify them for the credit.

Keep in mind that this is true even if your restaurant saw revenue increases during the pandemic.

3. The Credit is NOT the Same as the PPP

We find that many business owners confuse the ERC with the Payroll Protection Program (PPP), but there are several important differences.

Unlike PPP the ERC is a tax credit program, which means that if you are eligible, you are legally entitled to a tax refund. The great thing about this program is that you can use the funds for any purpose you like (because they are a refund) so you are not limited to using the money for payroll, like with the PPP.

If you do use the funds towards expenses that are deductible in your business, this can help reduce the income tax effect. We discuss this with clients to make sure they understand in their specific situation how the credit will impact their taxes.

 4. There are a Lot of Bad Actors in the Space

 The large amounts of money involved with the Employee Retention Credit has given rise to a “gold rush” style frenzy, with many companies forming to just process the ERC and aggressively marketing for clients.

 Many of these companies are not licensed or regulated by either the IRS or local accountancy boards, and are run by people with no experience in the accounting industry. They can also sometimes be outright scammers looking to intentionally overclaim credits or claim credits for businesses that do not qualify, profiting from the hefty percentage they take as a fee. These companies will disappear as quickly as they appeared once the IRS starts to enforce audits on these claims, leaving their unsuspecting clients holding the bag.

Unprincipled companies like these are currently running rampant because there is an enforcement gap between when the claims are filed and the IRS inspecting the claims. We’ve seen as large as 1MM overstatements from bad providers and you, as the taxpayer, are the one held responsible for an improperly claimed credit.

 5. It’s Available for a Limited Time Only

The ERC presents an incredible opportunity for restaurant owners recovering from the pandemic, but unfortunately won’t last forever, so it’s not a good idea to delay.

 The ERC is a one-time credit and will begin to phase out starting April 2023, so you will need to act well before then to make sure that you are receiving the full amount you are entitled to.

 You also want to make sure that your credit is filed in a timely manner. Due to the volume of claims and capacity limits at the IRS, there is a substantial wait time for processing, with smaller claims taking 3-4 months, and larger claims 6 months plus. It’s worth the effort to get into the queue now to avoid additional wait.

Finally, we want to emphasize that claiming your ERC is one of the highest value uses of your time possible. Again, even small operations are usually entitled to credits that run well into the six figures, while larger businesses regularly qualify for credits in the millions. Given that the process only takes a few hours, there is almost nothing a business owner can do that is a higher value per unit of time.