Three Essential Tax Credits that Every Hotel and Restaurant Should Take Advantage of in an Unpredictable Economy

According to recent data, there are over 15 million people working in the hospitality and leisure industry in the U.S. alone. And with COVID-19 continuing to impact labor shortages and a potential recession on the horizon, the hospitality industry will continue to be affected. The good news is that there are a few key tax credit programs that have been put into place to help offset these circumstances and for many businesses, taking advantage of them has helped to keep them afloat in turbulent times. 

However, confusion around tax credits is at an all time high, which is evidenced by a recent survey of more than 500 business decision-makers. Nearly half reported they didn’t know if their company qualified as the reason for not participating in federal or state tax incentive programs. Whatever the reasoning, the results indicate substantial missed opportunities, as some of these tax credits for qualifying companies reached up to $33,000 per employee in 2020 and 2021.

So which tax credits are hotels and restaurants entitled to receive and how can they quickly determine what they might be owed? Here we take a closer look:

• FICA Tip Credit: The Federal Insurance Contributions Act (FICA) mandates a payroll tax on the paychecks of employees, with matching contributions from employers. This tax credit was put in place to offer financial relief to employers whose employees receive part of their wages through tips given by customers. The credit is particularly relevant for participants in the hospitality industry that also operate restaurants as part of their operation and encourages employers to report tip income to their staff as taxable. The FICA tip credit should be reviewed at the end of each year to determine if a hotel or restaurant qualifies. More information on the FICA Tip Credit can be found here. 
• Work Opportunity Tax Credit: The Work Opportunity Tax Credit (WOTC), which was recently extended until 2025, is another employment-based tax incentive that provides a vehicle to deal with the economics associated with ongoing labor shortage issues created by COVID. The credit is available to companies who hire individuals from certain targeted groups who have consistently faced significant barriers to employment. An employee must work 120 hours to be eligible for WOTC and after 400 hours worked, can receive the maximum tax credit available. Depending on the target group and hours worked, companies could receive up to $9,600 per qualified employee. Restaurants and hotels can quickly assess how much WOTC they might be owed by clicking here.  
• Employee Retention Tax Credit: The Employee Retention Tax Credit (ERTC) was created to encourage businesses to keep employees on their payroll. Though the eligibility period has ended for ERTC, businesses can still retroactively claim this credit. To be eligible, a company must show they had:

(1) A decline in quarterly revenue, or 

(2) were fully or partially shut down due to governmental orders, or 

(3) began a new trade or business after February 15, 2020 and previously had less than $1 million in average annual revenue. 

For 2020, the ERTC was worth up to $5,000 per employee per year. In 2021, it was worth up to $7,000 per employee per quarter.  The statute of limitations for claiming it will run out on July 31st, 2023, so if you haven't assessed your eligibility for the program, you should do so now. Taking advantage of the ERTC could mean the amount of money that a restaurant or hotel could make in a three, four or five-year period, so it is well-worth looking into. To quickly assess how much your company might be owed, click here. 

With uncertain times ahead, it’s crucial that hotels and restaurants take advantage of the tax credits that are available to them. Ultimately, leveraging even one of these tax credits will help businesses in the hospitality industry increase profits and obtain additional cash flow, which will help to address labor shortages and the potential recession.

About  the Author

Terracina Maxwell is President & Co-Founder, Clarus Solutions, which helps employers transform their cash flow by simplifying access to employment tax credit opportunities. Founded by tax experts, Clarus believes in the power of tax credits for improving business financials and built its cloud-based platform to help more businesses unlock the full value of federal and state incentive programs.