For restaurants that have struggled during the COVID-19 pandemic, the employee retention credit (ERC) can be a welcome source of relief. Unfortunately, IRS processing delays have forced many restaurants to wait a long time before receiving their ERC refunds, in some cases more than one year. The longest wait times have been for retroactive ERC claims made on an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund (Form 941-X).

According to the IRS, as of December 14, 2022, it had approximately 347,000 unprocessed Forms 941-X, some of which cannot be processed until the related Forms 941 have been processed. Although the backlog of ERC claims has been shrinking in recent months, many taxpayers are still experiencing wait times in excess of eight months from the time a claim is filed.

Related Read: Is Your Restaurant Eligible for Employee Retention Credits?

Get Your Documentation in Order

Unlike some IRS filings, you cannot track the status of your ERC refund online, and it is difficult, if not impossible, to get this information by phone. While you are waiting, it is a good idea to review your detailed documentation that supports your claim. Although such documentation is not required at the time you file your claim, it may become necessary in the event of an audit. The IRS has already begun conducting examinations of ERC claims, in some cases issuing formal document requests before it processes a claim.

Although the IRS may scrutinize any aspect of the ERC, it is particularly important to have documentation supporting the following:

Suspension of Operations
Generally, to qualify for the ERC, you must show that either: (1) your operations were fully or partially suspended due to a COVID-19-related government shutdown order; or (2) you experienced a significant decline in gross receipts. If your claim relies on a suspension of operations, be prepared to identify the governmental orders that restricted your operations during the relevant calendar quarters.

Gross Receipts
If your claim relies on the gross receipts test, be prepared to document your calculations.

Calculation of the Credit
Among other things, you will need to document the qualified wages on which your claim is based and the applicable maximum credit for each relevant calendar quarter. You will also need to show that you did not “double dip” — that is, use the same wages to support an ERC claim and to support forgiveness of a Paycheck Protection Program loan.

Determination of the Number of Full-Time Employees
Smaller businesses (averaging 100 or fewer full-time employees in 2019) may claim the ERC for wages paid to all employees, regardless of whether they continued to work, while large businesses are limited to wages paid to employees who were not working. This can make a huge difference in the size of the credit, so be sure that you can document the number.

Proper Application of the Aggregation Rules
Certain related businesses are treated as a single employer for purposes of applying the ERC. Whether a restaurant is considered a single employer or part of a larger aggregated business (a restaurant chain, for example) can have a big impact on its eligibility for the ERC and the amount of the credit. For example, the restaurant may qualify as a small business, while the chain as a whole does not. And the restaurant may experience a significant decline in gross receipts, while the chain does not.

According to IRS guidance, you should retain records supporting your ERC claim for at least four years.

Related Read: Make the Most of the Employee Retention Credit

Apply for Penalty Relief

In some cases, claiming the ERC retroactively can trigger additional income tax. That is because your deduction for qualified wages in a previous tax year must be reduced by the amount of the credit. In an April 2022 news release, the IRS acknowledged that some taxpayers who find themselves in this situation are unable to pay the additional tax because they have not yet received their ERC refunds. The news release reminds businesses that they may qualify for relief from failure-to-pay penalties if they can show reasonable cause.

It Is Not Too Late to Claim the Credit

If you believe that you were eligible for the ERC in 2020 or 2021, it is not too late to claim the credit. You may amend your original Form 941 by filing Form 941-X up to three years after the original due date. So, for example, if you wish to claim the credit for the first quarter of 2021, you may file Form 941-X as late as April 30, 2024.

For more information about the employee retention credit, please contact Tom Pierce at [email protected] or 312.670.7444 . Visit ORBA.com to learn more about our Restaurant Group.