Hospitality industry may find relief in new ERC expansions

Source: RSM US LLP.   

ARTICLE | March 04, 2021

In 2020, the COVID-19 pandemic devastated the leisure and hospitality industry. Major metropolitan hotels either closed or operated with minimal occupancy levels throughout the pandemic and endured the most significant economic hardships. Suburban facilities faced closure early in the pandemic, but were able to open with reduced capacity and social distancing procedures after the initial pandemic response. Yet, nonurban U.S. resort hotels saw increased occupancy over summer 2020, with some properties showing near normal summer occupancy levels.

Due to the pandemic, hospitality businesses adapted their operations in numerous ways, including staff changes and the use of CARES (Coronavirus Aid, Relief and Economic Security) Act governmental relief programs. Larger brand management companies furloughed many on-site and corporate staff. Other hotel owners and managers needed to furlough both operations and administrative staff to ensure property survival. Many hospitality employers applied for and received PPP (Paycheck Protection Program) loans to bolster their business through the pandemic. Hospitality groups also considered the ERC (Employee Retention Tax Credit); however, the PPP loan recipients were ineligible for the ERC which limited the benefit of the ERC to the hospitality industry.

In December 2020, Congress passed the CAA (Consolidated Appropriations Act), both expanding ERC benefits to more employers retroactively in 2020 and extending benefits into the first two quarters of 2021.

Hospitality employers should reconsider the ERC, as it is available to companies of all sizes and has administrative ease simplifications for small businesses

The ERC does not apply if the reduction in activity of a business is merely due to economic conditions or voluntary closures.

One key CAA provision applicable to hospitality employers is retroactive ERC eligibility in 2020 for employers with PPP loans. Employers with qualified wages paid beyond those required for PPP forgiveness or certain other credits are eligible to apply those wages to the ERC retroactively for the 2020 tax year. Despite severely reduced staff during the pandemic, hospitality employers may still be able to claim the ERC if they have any qualified wages or health plan expenses paid on behalf of employees who did not work or worked at reduced capacity due to governmental mandates.

The hospitality industry may also take advantage of the CAA expansion of the ERC for 2021. The ERC credit applies to the first two quarters of 2021. In addition to the extension into the current tax year, the CAA allowed for the following:

• Increased the potential credit maximum from $5,000 per employee for the 2020 tax year to $7,000 per employee per quarter for the first two quarters in 2021 (total potential maximum credit of $19,000 per employee)
• Changed the gross receipts reduction threshold from 50% to 20% from 2020 to 2021
• Increased the small employer level from 100 to 500 full-time employees for the more favorable inclusion of wages paid to all employees rather than only to nonworking employees
• Allowed PPP recipients continued eligibility for ERC in 2021

Eligibility requirements for ERC

The intent of the ERC is to assist businesses either fully or partially affected by government orders or which suffered a significant decline in gross receipts. To meet the eligibility qualifications for the ERC, an employer must show either:

1. An employer fully or partially closed or reduced operations as a result of governmental orders or mandates.
2. An employer suffered a 50% decline or 20% decline in gross receipts for the relevant quarter(s) in 2020 and 2021, respectively, as compared to the same quarter(s) in 2019.

Under the governmental order qualifications, an employer must be able to show that a governmental order at the federal, state or local level affected the operation of the employer’s trade or business by limiting commerce, travel or group meetings. Any hospitality employer forced to close, reduce or cancel operations by jurisdictional order that is a normal source of business would readily meet this requirement if they also paid some of the furloughed employees’ health benefits, or if they paid employees for hours in which they could not work because of closures, reductions, etc. Hospitality businesses deemed essential that voluntarily closed, or that were otherwise not forced to close under ordersi have a higher burden to prove the applicability of governmental orders on their businesses, but many may still qualify. Mere reduction in customer traffic due to the overall environment or governmental orders is not sufficient to meet this requirement but cancellations of events because of the governmental orders can be a helpful fact.

Each employer’s situation will likely be unique based on the type of business, business location, jurisdictional orders, and economic impact in the relevant period. As governmental orders varied from jurisdiction to jurisdiction, employers should consider the eligibility requirement in light of the facts and circumstances in place for each period and location in question.

Examples of COVID-19 mandated restrictions to consider include:

• Hotels in metropolitan areas potentially closed per orders early in the pandemic and show historically low levels of occupancy since reopening.
• Suburban accommodation facilities potentially closed early in the pandemic with reduced occupancy levels since reopening.
• Nonurban resort/vacation destination hotels were near close-to-normal occupancy in the summer vacation period.
• Accommodation-only facilities may have been considered essential businesses and may not have been subject to mandated closing but may have been affected by other orders in some cases.
• Restaurants faced in-house dining shutdowns in many jurisdictions when COVID-19 caseloads were high as well as reduced capacity restrictions during lower caseload periods.
• Mixed facilities, such as accommodation facilities with in-person dining and event services (conferences, meetings, weddings, etc.), may have remained open as an essential business for accommodations with partial governmental shutdown of their dining or events services.
• Cruise ships subject to the Centers for Disease Control and
• Prevention (CDC)’s no sail order prevented embarkation in the Unites States for the majority of the year.

Alternatively, an employer can qualify for the ERC by showing a reduction in gross receipts for a quarter in any of the eligible periods. If an employer can show that aggregated gross receipts for a quarter compared to the same quarter in 2019 are 50% or less in 2020 and 20% or less in 2021, they are an eligible employer for the ERC. For 2021, an employer can elect to use the prior quarter’s gross receipts for purposes of this test.

Thus far, more employers have been eligible under the governmental order guidelines than the gross receipts eligibility guidelines. However, given the losses in the hospitality industry, the gross receipts test may be more useful to the hospitality industry than other industries.

In determining the eligible employer for the gross receipts test and total employee number for qualifications as a small business, an employer must aggregate related companies. Generally, an employer may require aggregation of controlled groups, combined groups, groups of entities with 50% or more voting power or value under specific conditions to determine gross receipts and employee totals for the small business application of ERC. An employer may have to apply additional aggregation tests, which may include an affiliated service group test.

Considerations when applying the ERC

A hospitality employer may want to consider a number of additional factors beyond eligibility for the ERC before claiming the credit such as mechanisms to maximize qualified eligible wages. An employer cannot use the same wages for the ERC as used for the PPP loan forgiveness or certain other credits, such as the work opportunity credit (WOTC).

Many employers in the hospitality industry furloughed workers, and may have insufficient wages to benefit from all applicable credits and full PPP forgiveness. An employer should review potential eligible periods and wages for ERC, PPP and other credits to develop a method that results in the best attribution of wages for each eligible period. The hospitality industry may consider the health care expenses especially attractive where employers furloughed staff in 2020. Ultimately, if the employer finds the above analysis still yields insufficient wages, PPP full dollar forgiveness would often be more attractive than a partial ERC credit for the wages in question.

One final note for an employer considering retroactive application of the ERC is that 2020 income tax returns may require an extension for the necessary due diligence to document eligible wages for ERC. The retroactive 2020 ERC requires filing an amended Form 941-X. An employer should exclude any ERC amount filed on the Forms 941 or 941-X from its wage deduction on the 2020 income tax return. Employers’ likely need to extend the 2020 tax return to reflect a proper income tax filing either by waiting until calculating the final number or by filing a superseded return with the final number.

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