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A Guide to Understanding Employee Retention Credits

by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director
March 6, 2022 | published in fsrmagazine.com

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Operators Have Missed Out On Millions Simply Because Of Common Misunderstandings

The last two years have forced many beloved restaurants to shut down or drastically reduce their customer capacity and services due to federal, state, or local government-mandated closures. Washington, recognizing the hardships these establishments have faced, has passed legislation to help address the cost of these operational adjustments to COVID orders. Unfortunately, franchise owners are still not taking full advantage of the significant federal tax benefits available to them.

It is not uncommon for a franchisee to receive a six to seven figure check from the government through the Employee Retention Credit (ERC) program, assuming they’re claiming all to which they are entitled. So why are so many restaurants missing out on potentially millions of dollars? It comes down to some common misunderstandings that are easy dispelled.

ERC for Franchisees

Before the outbreak, the restaurant industry, and particularly franchise restaurants, was one of the country’s largest private-sector employers. But according to a recent S&P Global analysis, the industry was among the most affected when the pandemic reached the U.S.

In the last two years, the pandemic has widely disrupted the day-to-day operations and distribution of goods and services across the entire country. In response, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing federal incentives like the ERC to help franchisees (and other small and medium businesses) claim necessary funds to resume operations and grow.

The ERC is the single-largest tax incentive program available to restaurants but when first introduced, the CARES Act did not allow a business owner to claim ERC and Paycheck Protection Program (PPP). However, at the end of 2021 this bar was lifted, and franchisees can now claim both the ERC and PPP. This hasn’t been well understood by many business owners—restaurants have been slow to realize that they can and should be looking to the ERC to help offset the costs of their disrupted operations due to a federal, state, or local COVID order.

Overcoming Disruptions

Almost every franchisee had to adapt to government mandates on COVID over the last two years; whether it was closing a location, limiting capacity, switching to delivery only, or adjusting hours, each franchisee felt the impacts of the actions they took to stay afloat.

What most franchisees don’t realize is that these responses to federal, state, or local COVID mandates (including orders from regulatory agencies) are all activities that may qualify them for the full value of the ERC. Many businesses have been under the mistaken assumption that they had to have had a decline in revenue to qualify but that is only one qualification method. Even a restaurant with an increase in revenue could still qualify if they had to adjust—with a more than nominal toll on their business operations—to government mandates.

Franchisees are good candidates for the ERC if they had to face one or more of the following disruptions:

  • Government-mandated shutdowns (full and partial)
  • Declines in product or service output
  • Altered day-to-day operations
  • Supply chain disruptions
  • Capacity limitations

What is critical here is that even if only one of a franchisee’s locations was impacted and the others operated as normal, that franchisee could potentially claim the ERC credit for ALL locations.

The True Value of the ERC

As an example, a franchise owner had three restaurants in Texas with 54 employees between them. The owner claimed PPP and had no decline in revenue so assumed that they did not qualify for the ERC.

All locations, however, had capacity restrictions due to social distancing orders that had a more than nominal impact on business operations and thus all locations qualified for the ERC. The credit is delivered as a cash refund on wages paid to employees during the effected period so with 54 employees, this franchisee received a $462,000 check.

It is worth noting that even if only one of the locations faced disruptions, the result would have still been the same and all locations would have qualified. This is the piece even many franchisees familiar with the credit are missing.

Confused About Claiming the ERC?

There are other confusing aspects about ERC. As the number of businesses claiming the ERC grows every day, so too does the amount of inaccurate or incomplete information that circulates around it. Many businesses have self-censored and disqualified themselves improperly due to misinformation or misunderstandings about the ERC.

Here are a few frequent misunderstandings to keep in mind:

  • If you have initially claimed PPP, you can’t claim ERC. While this was originally the case, Congress has expanded the ERC so businesses can now claim it even if they’ve already claimed PPP and/or had a loan forgiven.
  • Your business had to experience a full shutdown to qualify. A business can be eligible for the ERC even if it was only forced to partially cease or cut back on activities due to government mandates.
  • The ERC is only available for under-performing franchises. You may also still be eligible for the ERC, even if your company grew during the pandemic. Congress wants these businesses to claim the ERC as well, so they can contribute more money back into the economy. The incentive rewards those businesses that retained staff and still conducted their daily activities amid lockdowns, and certain expenses are still allowable for business owners that quickly transitioned to a COVID economy and managed to experience growth.

The ERC can be worth up to $26,000 per employee that remained on payroll during the impacted period. So, for franchisees that have passed on the credit or have yet to closely review it, now is the time to sharpen your pencil and look again.

Looking Towards a Brighter Future

While experts are unsure of the long-term impact of COVID-19 on franchises, this industry has shown its tenacity by persevering with new tactics. By leveraging a powerful federal incentive like the Employee Retention Credit, businesses can get the longer-lasting financial boost they need to retain employees, hire talent, and maintain business relationships with local suppliers and partners.

About the Author

Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.

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