Employee Retention Credit: Key Updates Restaurant and Franchise Owners Should Know

At a glance:

• The main takeaway: The IRS is closely scrutinizing businesses that filed for the Employee Retention Credit (ERC) during the pandemic, including many restaurant and franchise owners.
• Impact on your business: It is important to closely examine the ERC rules with your accountant to make sure that you handled credit-related wage deductions correctly.
• Action steps: Missteps could trigger an IRS audit. Contact Aprio’s Restaurant, Franchise, and Hospitality team to make sure you are compliant with the ERC requirements.

The full story:

The IRS is ramping up its scrutiny of businesses that claimed the Employee Retention Credit (ERC) — and restaurant and franchise owners are among those who may be impacted. As the number of ERC audits increases, the IRS has also taken care to clarify the rules around ERC eligibility and the proper approach for handling wage deductions related to the credit.

As part of this effort, the IRS updated the ERC FAQs on its website in March, specifically addressing how the credit should be handled from an income tax perspective. These updates strive to answer three questions that have caused confusion for business owners, restaurant and franchise owners included.

1. Should I have reduced my wage deduction when I claimed the ERC?

Yes. If your restaurant or franchise claimed the ERC, you were expected to reduce your wage deduction on your income tax return for the year in which you filed the ERC claim. The IRS views the ERC as a form of reimbursement for qualified wages, meaning the related expense shouldn’t be fully deducted.

2. What if I didn’t reduce my wage expense and received the ERC in a later year?

If you didn’t reduce your wage deduction in the original tax year and then received the ERC in a later year, you don’t need to amend that prior return. Instead, the IRS wants you to report the amount of the ERC as additional income in the year you actually received the payment.

3. What if my ERC claim was denied after already reducing my wage deduction?

If you reduced your wage expense on your tax return based on an ERC claim and then later found out the claim was denied, you have two options:

• You can increase your wage deduction in the year you were notified of the denial, or
• You can amend your earlier return to reflect the correct (higher) wage expense.

Franchise partnerships may need to submit an Administrative Adjustment Request (AAR) to the IRS, instead of a standard amended return.

Why the ERC update matters to restaurant and franchise operators

Many restaurants and franchises applied for the ERC during the pandemic to keep their businesses afloat. If you were one of them, it is critical to make sure your tax filings properly reflect how you handled the ERC. Missteps can trigger an IRS audit or unexpected tax bills.

If you are unsure about how the ERC changes affect your business, now is the time to check in with your CPA or tax advisor. Staying compliant helps protect your restaurant or franchise business — and your peace of mind.

Need help? Contact Aprio’s Restaurant, Franchise, and Hospitality team today to review your tax filings and plan next steps.

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