Top Tax Considerations for Hospitality in 2021
The COVID-19 pandemic sent the restaurant industry into a nosedive in 2020 and, for many, their cash position continues to mean the difference between survival and permanent closure. Federal stimulus loans will continue to serve as the key to financial survival for many restaurants, but there are also important tax considerations that can have a meaningful impact to the bottom line. Here are our top five areas to look at in 2021.
Expanded employee retention credit
The employee retention credit (ERC) — aimed at businesses that suffered a significant decline or were fully or partially shut down because of government regulations — was first introduced in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As originally introduced, the ERC provided qualifying employers the opportunity to claim a 50% refundable credit based on up to $10,000 of payroll costs for qualifying employees (i.e., a maximum $5,000 per employee credit). Companies were restricted from claiming the ERC if they also obtained a loan through the Paycheck Protection Program (PPP). Since the PPP had the potential to be fully refundable (becoming the economic equivalent of a grant) and could potentially offset far more than $5,000 per employee, many companies opted to pursue a PPP loan and forego opportunities to claim the ERC.
However, a significant change enacted by the Consolidated Appropriations Act (CAA) in December 2020 allows companies that obtained a PPP loan to also retroactively claim the ERC for qualifying expenses incurred in 2020. Expenses supporting PPP loan forgiveness are excluded from the ERC calculation, but this is a significant opportunity to retroactively claim additional employer incentives.
The ERC was also expanded to allow for additional credits in 2021. Employers may claim a 70% credit of up to $10,000 of payroll costs for qualifying employees per quarter during the first two quarters of 2021 (i.e., a maximum of $14,000 per employee). The employer eligibility requirements were also modified to simplify qualification and expand the computation of qualified wages.
Expanded employee retention credit
The employee retention credit (ERC) — aimed at businesses that suffered a significant decline or were fully or partially shut down because of government regulations — was first introduced in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As originally introduced, the ERC provided qualifying employers the opportunity to claim a 50% refundable credit based on up to $10,000 of payroll costs for qualifying employees (i.e., a maximum $5,000 per employee credit). Companies were restricted from claiming the ERC if they also obtained a loan through the Paycheck Protection Program (PPP). Since the PPP had the potential to be fully refundable (becoming the economic equivalent of a grant) and could potentially offset far more than $5,000 per employee, many companies opted to pursue a PPP loan and forego opportunities to claim the ERC.
However, a significant change enacted by the Consolidated Appropriations Act (CAA) in December 2020 allows companies that obtained a PPP loan to also retroactively claim the ERC for qualifying expenses incurred in 2020. Expenses supporting PPP loan forgiveness are excluded from the ERC calculation, but this is a significant opportunity to retroactively claim additional employer incentives.
The ERC was also expanded to allow for additional credits in 2021. Employers may claim a 70% credit of up to $10,000 of payroll costs for qualifying employees per quarter during the first two quarters of 2021 (i.e., a maximum of $14,000 per employee). The employer eligibility requirements were also modified to simplify qualification and expand the computation of qualified wages.
Paycheck Protection Program Round Two
The CAA also brought significant changes to the PPP, including PPP Second Draw Loans (PPP2), expanded loan amounts for accommodation and food service employers, and an expanded list of qualifying costs for forgiveness.
Any income resulting from forgiveness of PPP2 loans isn’t taxable, and expenses paid for with Second Draw funds are still deductible. This is also the result for original PPP loans due to the CAA. Borrowers are required to retain supporting records related to employment for four years and other records for three years. Reports must show the support received from ERC credits and PPP loans to ensure they aren’t using the same wages. Good recordkeeping is critical because the SBA may review and audit these loans to check for fraud.
Work Opportunity Tax Credit Extension
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers to encourage the hiring of groups that include disabled workers, recipients of federal assistance, long-term unemployed, and qualified summer youth employees and veterans. The credit has been extended to 2025. Many restaurants aren’t taking advantage of this opportunity so consider whether it’s a good match for your business when making future hiring decisions.
Changes to Meals Deductibility
The CAA modifies the existing rules for business expense deductions by making 100% of business meals deductible in 2021 and 2022 if the meals are provided by a restaurant. Additional guidance may clarify the extent of this rule, but it appears to significantly expand business meal deductions with the limited caveat that they must be provided by a restaurant.
This change is expected to increase business tax deductions for the next two years while also providing support to restaurants that continue to face significant challenges due to COVID-19.
Federal Tip Credit
Finally, the FICA tip credit enables restaurants to claim a credit against their federal income tax based on the share of FICA and Medicare taxes they pay on tip income reported by employees. This credit is unique to restaurants due to the low hourly rate paid to tipped employees — usually the waitstaff — that frequently falls below the federal minimum wage.
Unfortunately, the calculation isn’t as easy as just multiplying reported tips by the FICA percentage — there’s a myriad conditions and caveats that add complexity to the calculation, so professional assistance is usually necessary.
While the hospitality industry continues to face major challenges heading into 2021, significant relief is available through a combination of tax credits and forgivable loans. Some of the benefits are time-sensitive so business owners should start planning without delay. For further information about eligibility and how these benefits apply to your business, please give us a call.
The CAA also brought significant changes to the PPP, including PPP Second Draw Loans (PPP2), expanded loan amounts for accommodation and food service employers, and an expanded list of qualifying costs for forgiveness.
Any income resulting from forgiveness of PPP2 loans isn’t taxable, and expenses paid for with Second Draw funds are still deductible. This is also the result for original PPP loans due to the CAA. Borrowers are required to retain supporting records related to employment for four years and other records for three years. Reports must show the support received from ERC credits and PPP loans to ensure they aren’t using the same wages. Good recordkeeping is critical because the SBA may review and audit these loans to check for fraud.
Work Opportunity Tax Credit Extension
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers to encourage the hiring of groups that include disabled workers, recipients of federal assistance, long-term unemployed, and qualified summer youth employees and veterans. The credit has been extended to 2025. Many restaurants aren’t taking advantage of this opportunity so consider whether it’s a good match for your business when making future hiring decisions.
Changes to Meals Deductibility
The CAA modifies the existing rules for business expense deductions by making 100% of business meals deductible in 2021 and 2022 if the meals are provided by a restaurant. Additional guidance may clarify the extent of this rule, but it appears to significantly expand business meal deductions with the limited caveat that they must be provided by a restaurant.
This change is expected to increase business tax deductions for the next two years while also providing support to restaurants that continue to face significant challenges due to COVID-19.
Federal Tip Credit
Finally, the FICA tip credit enables restaurants to claim a credit against their federal income tax based on the share of FICA and Medicare taxes they pay on tip income reported by employees. This credit is unique to restaurants due to the low hourly rate paid to tipped employees — usually the waitstaff — that frequently falls below the federal minimum wage.
Unfortunately, the calculation isn’t as easy as just multiplying reported tips by the FICA percentage — there’s a myriad conditions and caveats that add complexity to the calculation, so professional assistance is usually necessary.
While the hospitality industry continues to face major challenges heading into 2021, significant relief is available through a combination of tax credits and forgivable loans. Some of the benefits are time-sensitive so business owners should start planning without delay. For further information about eligibility and how these benefits apply to your business, please give us a call.
CONTACT PLANTE MORAN
Dean Feenstra
dean.feenstra@plantemoran.com
616-643-4034
Dipti Vaishnav
dipti.vaishnav@plantemoran.com
586-416-4936
Emily Kranick
emily.kranick@plantemoran.com
586-416-4950
Dean Feenstra
dean.feenstra@plantemoran.com
616-643-4034
Dipti Vaishnav
dipti.vaishnav@plantemoran.com
586-416-4936
Emily Kranick
emily.kranick@plantemoran.com
586-416-4950
