Supporting Franchises Through COVID-19: Claiming Employee Retention Credits

The pandemic placed immense strain on many franchise businesses. Disruptions differed across franchise locations, with some shut down entirely while others operated reduced hours with lower revenues. The Employee Retention Tax Credit offers potential relief, but claiming it poses challenges given decentralized operations. This article examines ERC qualification and documentation approaches appropriate for franchises.

Overview of the Employee Retention Tax Credit

The Employee Retention Credit (ERC) is a refundable payroll tax credit established by the CARES Act to incentivize employer retention of staff through the pandemic. Key attributes include:

  • 50% credit on the first $10,000 of eligible wages per employee for 2020. Rises to 70% credit per quarter in 2021.
  • Applies to qualified wages paid from March 13, 2020, through December 31, 2021.
  • Eligibility requires a 20% or greater decline in gross receipts compared to the same quarter in 2019.
  • Claimed against employer payroll taxes. Excess credits get refunded via IRS Form 7200.

This credit helps offset labor costs, making it very appealing for impacted franchises. However, de-centralized operations introduce complexities for eligibility and documentation.

Assessing COVID-19 Franchise Impacts

The diversity of franchise business models means pandemic impacts likely differed:

  • Fast food franchises may have remained open but at reduced hours with decreased revenues.
  • Full-service restaurant franchises often faced government-mandated dine-in shutdowns.
  • Retail franchises could have experienced lower foot traffic and sales.
  • Hotel franchises grappled with extremely low occupancy rates.
  • Service franchises like gyms faced full closures in many areas.

These variable disruptions make claiming credits complex.

Qualifying Criteria

Franchise locations can qualify for the ERC based on either:

  1. COVID-19 governmental orders fully or partially suspending operations.
  2. Gross receipts declined 20% or more, compared quarterly to 2019 levels.

However, the decentralized nature of franchises means aggregating enterprise-wide impacts to identify eligible locations is difficult.

Documenting Eligibility

To claim ERCs, franchises need documentation showing:

  • Which locations faced COVID-19 suspensions or restrictions on operations, and for what periods?
  • Quarterly gross receipts for each franchise location in 2019/2020/2021 to enable specific decline calculations.
  • Consolidated computations proving franchise location eligibility based on entity-level restrictions or revenue reductions.
  • Detailed substantiation of any claimed qualified wages per employee by location.
  • Computations segregating credits attributable to each eligible franchise location.

Obtaining, organizing, and reconciling all the required support is highly complex for franchises.

Claiming Credits

Operationally, eligible franchise locations can claim ERC amounts on IRS Form 941 quarterly payroll tax returns. But coordination complexities arise:

  • Credits must be separately quantified and reported at the entity level for each qualifying location.
  • Multi-location employers cannot aggregate credits enterprise-wide on one Form 941.
  • Advance credit payments (Form 7200) and gross receipts support must also be claimed and provided at the local entity level.

Significant administrative challenges exist for properly documenting and claiming decentralized credits.

Qualified Wage Rules

Complying with ERC-qualified wage requirements poses additional difficulties for franchises:

  • For employers over 100 full-time (FT) staff, credits only apply to the wages of non-working employees. The 100 FT threshold must be applied individually across eligible entities.
  • Employers under 100 FT employees can claim all staff wages, even for hours worked. Determining FT headcounts still needs to happen per location.
  • Wages exceeding $10,000 per employee for a quarter do not qualify. This must be tracked employee-by-employee for every operating location.

Applying these rules demands extensive location-specific data.

Best Practices for Franchises

Franchises should follow these best practices to improve ERC substantiation and claiming:

  • Centralize collection, organization, and retention of all franchise location revenue data, headcounts, and COVID-19 impact documentation.
  • Institute standardized processes for determining location-level eligibility based on measurable decline thresholds and suspension periods.
  • Develop consistent procedures for computing qualified wages, with clear rules on thresholds and limitations.
  • Provide comprehensive ERC claiming instruction to local payroll functions outlining qualification requirements, required documentation, and proper completion of IRS reporting forms.
  • Coordinate credit claims across entities to prevent duplicate ERC claims on shared employees or mixed headcounts.

With robust controls and procedures, franchisees can access these valuable credits despite added complexities.

Conclusion

The Employee Retention Credit provides important relief to help franchises retain staff during COVID-19 challenges. However, decentralization makes demonstrating location-level eligibility, documenting qualified wages, coordinating multi-entity claims, and aggregating overall credit impact extremely difficult. Franchises require enhanced data collection, standardized procedures, centralized oversight, and integrated systems to tackle these hurdles and secure available credits. Proper execution can help offset pandemic impacts, but specialized processes are a prerequisite for franchises to overcome compliance barriers and rightfully obtain ERC support.

Frequently Asked Questions

Q: Can franchise locations qualify for the ERC?

A: Yes, individual franchise establishments can qualify by meeting suspension or gross receipts decline criteria. However, documentation and claiming are complex.

Q: How do franchises document location eligibility?

A: Detailed substantiation must be maintained of COVID-19 impacts, operations suspensions, and revenue declines for each franchise location claiming credits.

Q: Can franchises aggregate credits across locations?

A: No, credits must be calculated, reported, and claimed at the individual entity level for each eligible franchise establishment.

Q: What qualified wage documentation must franchises maintain?

A: Extensive location-specific records supporting qualified wages paid to employees, coordinating with headcounts and hours worked per employee.

Q: How should franchises claim ERCs for multiple locations?

A: Each franchise entity claims credits on separate Form 941 filings. Advance payments also require separate Form 7200 for each location.

Helpful Franchise ERC Resources:

  • IRS Form 941 Instructions – Claiming Employee Retention Credits
  • IFA COVID-19 Pandemic Resources
  • Guidance on Substantiating and Documenting Credits (U.S. Chamber)
  • AICPA Calculator for Employee Retention Credits
  • Small Business Administration ERC Guide for Franchises

Due to decentralization, franchises require customized procedures, documentation, and coordination to properly qualify for and claim ERCs. Consult a tax advisor for guidance tailored to your franchise organization.

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