The Employee Retention Tax Credit (ERTC) is one of the best ways for those in the U.S. hospitality industry to regain their footing in a post-COVID age. Unfortunately, according to current estimates, many eligible businesses are missing out on this historic opportunity.
Contributed by Catherine Tindall, partner and CPA, Dominion Enterprise Services, Epping, New Hampshire
For those who received or may otherwise be familiar with the Paycheck Protection Program, also known as the PPP, the concept is similar, but there are key differences that make the ERTC a much more generous program overall. To understand why I will outline some of the key provisions and eligibility parameters, explain the process for claiming the credit (including common pitfalls to avoid), and answer some common questions I encounter in my own practice, such as “why haven’t I heard of this before?”
The ERTC is a tax refund credit entitling employers to up to US$26,000 per employee, depending on the number of quarters a business qualifies for. Eligibility is determined by either revenue disruptions or government orders on a quarterly basis. For revenue disruptions, the calculation is a quarter-by-quarter comparison, making for a quick calculation to assess if revenues were disrupted enough to qualify. For government orders, the eligibility is triggered by a government mandate which directly restricted a business’s operations. Capacity limits on occupancy and restrictions on dining are clear-cut examples of qualifying events, meaning that the vast majority of businesses in hospitality are entitled to substantial credits.
The credit can be complex, especially for organizations with multiple operating entities and shared ownership, but this also presents a great opportunity to maximize the amount you are entitled to. Many organizations do not realize that they are eligible for multiple businesses through attribution rules. For example, if a restaurant operation that is part of the hotel was subject to government mandates restricting dining capacity, this restriction could then trigger eligibility for the hotel operations given a shared ownership structure. We routinely see businesses qualify for six or seven-figure credits under these parameters.
There are a number of features that set this credit apart from other programs designed to aid businesses affected by the pandemic, like the PPP. Unlike the PPP, the credit itself comes back as paper checks from the IRS, and also unlike the PPP funds, which had a required use, a business owner is free to use the ERTC however he or she sees fit. This is because the credit is actually a refund of wages and payroll taxes your organization has already paid.
A consequence of this is that there is no overall program limit on the funds to be disbursed through the ERTC, in contrast to the PPP which had a limited fund pool. Businesses affected by government orders are entitled to every cent they qualify for. Taken together, all of these factors are what give this program its power. The only limitation is time. This credit will begin to be phased out in April of 2023, meaning that business owners need to ensure they submit their claims as soon as possible.
All of this is to say that, given the tremendous upsides, every business owner in the hospitality space should try to see if their business qualifies, even if it seems doubtful. There is no need to educate yourself too deeply about the credit’s provisions, the important thing is to find the right professional, and here one must be careful.
There are several different companies providing these ERTC calculation services. Some are licensed CPA firms, while others exclusively process the ERTC while claiming special expertise. Since hospitality operations often present the complexity of ownership structure and other complicating factors, we strongly recommend working with a licensed CPA firm. The key to any tax credit is getting the claim correctly calculated. Many taxpayers do not realize that when they have an incorrectly claimed credit, it is they, the taxpayers, who are on the hook, not exclusively the provider. Furthermore, a licensed firm will be in a much better position to handle an examination by the IRS, which can happen at any time in a three-year window after filing your credit claim.
There are unfortunately a lot of bad actors in this space, and many of them are very good at seeming legitimate. We have encountered some cases of processors using illegal tactics like qualifying companies without researching actual government orders and trying to escrow taxpayer refunds themselves. In general, if a provider comes across as “salesy” or otherwise pushy in their presentation and in the engagement process, there is a good chance that you are dealing with a firm that is not reputable. Another characteristic to look out for is if the firm provides other services besides ERTC processing and has a track record they can stand by. Many illegitimate companies formed recently just to provide ERTC processing, and they will disappear once the window to claim the credit times out, leaving you without support in the event that the IRS examines your case.
The following are some of the most asked questions associated with the ERTC:
What is the timeframe for getting paid the ERTC by IRS? For smaller claims, turnaround times from the IRS are improving to a three-to-five-month delay. For larger claims, which is the norm for hospitality organizations, it can take anywhere from nine to 12 months for the IRS to process the claim. The good news is that the IRS is allocating more personnel to the paper processing units, so we anticipate wait times to decrease as the program continues.
Should I get a second opinion? Because of the substantial nature of these credits, it’s often worth speaking to multiple providers for the credit to get a sense of the relative merits of each, and to look to the expertise and experience of those working on your case rather than fancy marketing or smooth sales tactics.
Why haven’t I heard about this before? There are several reasons why many business owners have not heard of this important credit. One is that, in contrast to the PPP program, the ERTC has not been well advertised by the government. Another is that many tax practitioners are hesitant to pursue it given the complex nature of the claims. Finally, we commonly find that too many CPAs mistakenly believe that their clients do not qualify for the credit, and so never bring up the possibility of claiming it with them.
Whether this is the first time you have heard of the ERTC, or if you have heard of it but have not tried to claim it, or if you did consider claiming it only to be told by your CPA or bookkeeper that your business does not qualify, I would encourage you to actively explore eligibility. The potential benefits of qualification, hundreds of thousands of dollars in obligation-free money from the IRS, is one of the highest value things you could do for your hospitality business in the current environment of economic uncertainty. With less than a year before it begins to phase out, now is the time to claim.