Understanding tax credit eligibility can feel overwhelming and confusing, especially for businesses that are in the hospitality industry. More often than not, day-to-day operations are time-consuming and take precedence over everything else. In addition, the industry was (and continues to be) the hardest hit by COVID-19, which is why there has never been a more critical time for hotels and other hospitality business owners to determine which tax credits they are eligible to receive—the potential benefit is too great to pass up.
So which tax credits are we referring to, and how can your business determine eligibility? Here we break down three key tax credits for the hospitality industry:
- 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 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 that 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, depending on the target group and hours worked, companies could receive up to $9,600 per qualified employee. Hospitality business owners 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 Feb. 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 business 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.
For one hotel in Minnesota, COVID-19 put major limitations on their ability to hold corporate and private events on-site, as well as capacity and closing requirements. As a result, gross receipts for the hotel were impacted throughout 2020 and early 2021. After taking advantage of ERTC, the hotel was eligible to receive $215k in tax credits for their hotel and an additional credit of $400k for their restaurant.
For more information or to help your business determine eligibility, we recommend getting in touch with tax credit experts. What you’ll find is that it’s a small price to pay for the potential payback that your company is owed.
Terracina Maxwell is president/cofounder of Clarus Solutions.
This is a contributed piece to Hotel Business, authored by an industry professional. The thoughts expressed are the perspective of the bylined individual.