Employee Retention Credit: Does Your Franchise Qualify?

As businesses navigate the impacts of COVID-19, many are exploring avenues for financial recovery, including the Employee Retention Credit (ERC). This tax credit, established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, aims to support employers who maintained their workforce during pandemic-related restrictions.

However, there are specific criteria that franchises, particularly restaurants, must meet to qualify for this credit. Here’s what you should know about the ERC, according to information from Experian.

The ERC functions as a payroll tax credit based on a percentage of qualified wages paid to employees. The eligibility requirements depend on the number of employees and whether the employer experienced a partial suspension of operations due to government orders. This includes additional costs related to health and safety requirements, capacity restrictions, or a measurable loss of profit.

Despite the potential benefits, there are several misconceptions that have led some businesses, including restaurants, to hesitate in claiming the ERC:

• Revenue Growth: Many restaurants, particularly those in the fast-food industry, experienced revenue growth due to increased takeout orders during the pandemic. However, revenue growth does not disqualify a business from claiming the ERC.

• Essential Business Designation: Being designated as an essential business and remaining operational does not automatically disqualify a business from claiming the ERC. The credit is still available if the business experienced a partial suspension of operations.

• Partial Shutdown: A common misconception is that a business must be fully shut down to qualify for the ERC. However, even partial suspensions or restrictions to normal operations can make a business eligible.

• PPP Loan Recipients: Initially, businesses that received Paycheck Protection Program (PPP) loans were ineligible for the ERC. However, this restriction has since changed, and businesses can now qualify for both.

Franchise owners with multiple locations can file a separate ERC claim for each of their establishments. However, individual locations may be subject to unique local and state mandates, requiring precise calculation of the credit for each one. Working with tax experts who understand aggregation rules and local mandates can streamline the process and maximize the financial benefit for franchise owners.

Franchises can benefit from the Employee Retention Credit if they meet the eligibility criteria outlined by the IRS. Businesses that experienced a partial suspension of operations or faced capacity restrictions may qualify for the credit. By carefully assessing the impact of government mandates on each location and working with tax professionals, franchise owners can fully realize the financial benefits of the ERC for their businesses.