As states and local jurisdictions begin lifting restrictions surrounding the COVID-19 pandemic, restaurants are eagerly anticipating returning customers, increased dine-in capacities, and movement to prepandemic operations—hopefully along with prepandemic income levels.
While staffing challenges are often identified as the biggest concern as openings expand and restrictions lift, restaurants should also consider some additional items that can impact their bottom lines. These are outlined below.
Tax Opportunities for Hiring and Staffing
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was extended through December 31, 2021. However, most restaurants utilizing this valuable refundable credit meet one of the key eligibility requirements due to operational restrictions. For instance, they’ve partially suspended their operation by limiting capacity or hours.
If restrictions are lifted, restaurants may need to rely on a 20% gross receipts reduction in the current quarter as compared to the same quarter in 2019 instead of the suspension rule.
Restaurants need to consider whether this could result in no longer being eligible for the credit for wages paid after restrictions are lifted.
Work Opportunity Tax Credit
As part of COVID-19-related legislation, the Work Opportunity Tax Credit (WOTC) was extended through December 31, 2025. WOTC is available when a restaurant hires individuals from targeted groups who have consistently faced barriers to employment. The credit can be as much as $9,600 per employee.
As the job market continues to challenge restaurants, they can benefit from hiring individuals within these groups.
In addition, restaurants should have a process in place to identify qualified hires when onboarding to verify money isn’t left on the table.
Cost Savings for Capital Expenditures
Equipment and Improvement Spending
As optimism increases and cash flow improves, restaurants will likely take on deferred equipment upgrades and replacements as well as leasehold and building improvements. While there are restrictions, so-called bonus depreciation still applies for most restaurant equipment, furniture, and improvements in 2021.
This results in an immediate deduction for capitalized items for federal tax purposes. Many states have similar provisions as well.
Restaurants should be sure to capture all eligible costs to benefit from this opportunity. They should also consider the tax savings when making decisions on how much capital expenditure is available for these investments.
New Locations and Remodels
Restaurants considering expanding the number of locations should always be looking for concessions from landlords and local governments related to rent, tenant allowances, and taxes.
In addition, they should consider the impact of bonus depreciation here as well. New locations, expensive build-outs, construction costs, and remodeling projects often result in large amounts being capitalized.
Performing a cost segregation study to analyze the various aspects of these projects can result in larger amounts being allocable to assets qualifying for bonus depreciation. Again, any tax savings generated can reduce the overall cost of these large projects.
Learn more about available reconfiguration benefits for restaurants and property owners in our articles:
Product Policies, Delivery, and Costs
48 states have allowed to-go alcohol during the pandemic. Some already had few or no restrictions, some have made to-go options permanent, and some have extended to-go options through specific dates in 2021.
Be sure you’re aware of any upcoming changes to delivery and consider the impact on sales, staffing, inventories, and insurance requirements if restrictions come back into play where you operate. This also includes any potential changes to delivery partners’ policies on alcohol deliveries.
Some delivery platforms offered discounts, however small, during the pandemic to their restaurant partners. Now’s a good time to check if there’s any pricing change when government restrictions lift.
In addition, some local governments enacted laws placing a maximum on third-party platforms’ delivery charges. Look into when those may expire and consider the increased costs that could result.
Restaurant Revitalization Fund
The American Rescue Plan Act (ARPA) established the Restaurant Revitalization Fund (RRF) to help restaurants recover from the COVID-19 pandemic.
For restaurants that received funds, the money can be used to pay most operating expenses. A best practice for anyone receiving RRF funds who also has a Payroll Protection Plan loan, or who can avail themselves of ERTC, is to carefully consider how to allocate various expenses, especially payroll, to benefit from all three.
If your restaurant received aid from any of these funds, it could qualify for loan forgiveness. Learn more in our article, How Loan Forgiveness Works with Paycheck Protection Program Loans.
Federal Insurance Contributions Act (FICA) Payroll Tax Deferral
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer the deposit and payment of the employer share of Social Security tax that would otherwise have been due on or after March 27, 2020, and before January 1, 2021.
If your restaurant elected to use this deferral, half of the deferred amount is due and payable on or before December 31, 2021. The other half is due on or before December 31, 2022.
Restaurants should take care to verify these cash outflows are included in any cash flow projections for the balance of 2021.
While many restrictions are being lifted, local restrictions may exceed national and state changes. These include:
- Continued personal protective equipment (PPE) requirements
- Employee leave rules and related costs
- Additional payroll credits and tax incentives
To navigate these changes, stay up to date through associations, such as your state restaurant association.
We’re Here to Help
If you have questions on what these changes mean for you or your organization and would like assistance exploring opportunities, please contact your Moss Adams professional.