ERC for Restaurants: Understanding Your Eligibility and Audit Risk

Restaurants were among the hardest-hit industries during COVID-19, making many legitimate candidates for the Employee Retention Credit. However, the restaurant industry also saw significant improper claims, making it a focus for IRS audits. Here's what restaurant owners need to know about ERC eligibility and defending their claims.

Why Restaurants Often Qualified for ERC

Many restaurants legitimately qualified for the Employee Retention Credit:

• Mandatory shutdowns: Many jurisdictions ordered restaurants to close entirely during early 2020.
• Indoor dining restrictions: Bans on indoor dining constituted a partial suspension of operations even when takeout continued.
• Capacity limits: 50%, 25%, or other capacity restrictions directly impacted restaurant operations.
• Operating hour restrictions: Curfews and limited hours reduced operational capacity.
• Gross receipts decline: Many restaurants experienced the 50% (2020) or 20% (2021) revenue decline required for eligibility.

Common Restaurant ERC Audit Issues

The IRS is scrutinizing restaurant ERC claims for these issues:

• Takeout vs. dine-in distinction: If your restaurant continued full takeout operations, the IRS may question whether you had a 'suspension' of operations.
• Partial suspension documentation: You need to document exactly how capacity limits or restrictions impacted your specific restaurant.
• Multiple location issues: Different locations may have had different restrictions—claims should reflect this.
• Timeline accuracy: Claiming ERC for periods when restrictions weren't in effect raises red flags.
• PPP wage overlap: The same wages can't be used for both PPP forgiveness and ERC.

Documentation Restaurants Need

To defend your restaurant ERC claim, gather:

• Government orders: Copies of federal, state, county, and city orders that restricted your operations.
• Capacity limit evidence: Documentation showing specific capacity restrictions and how they affected your seating.
• Revenue comparison: Quarterly gross receipts for 2019 vs. 2020/2021 showing the decline.
• Operational changes: Documentation of how you modified operations (reduced hours, limited menu, etc.).
• Employee records: Payroll records showing wages paid during eligible quarters.
• Timeline documentation: Clear records of when restrictions began and ended in your jurisdiction.

Defending Your Restaurant ERC Claim

If audited, your defense should demonstrate:

• Specific impact: How the government orders specifically affected YOUR restaurant's operations—not restaurants in general.
• More than nominal: That the impact was 'more than nominal' (generally more than 10% of operations).
• Accurate timeline: That you only claimed ERC for quarters when restrictions actually affected you.
• Proper calculations: That your wage calculations and PPP coordination were done correctly.