COVID-19 had a profound impact on the fitness industry. With states and municipalities forcing the closure of facilities, limiting capacity, implementing social distancing and instituting PPE restrictions, fitness clubs were seeing fewer and fewer new members. Additionally, the industry saw a significant uptick in cancellations.
According to IHRSA, revenue dropped by 58% in 2020, and 17% of U.S. fitness facilities closed permanently, with many more slotted to be shuttered. With over 1 million furloughed employees and eight large fitness companies filing for bankruptcy, the industry entered 2021 on shaky ground.
Fortunately, government programs such as the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) assist struggling operators within the health and wellness sector.
Can Fitness Centers Get Both the PPP and the ERC?
The PPP and the ERC offer relief to fitness centers and other similar types of companies. It’s important to understand how these programs interact to avoid leaving money on the table. The rules around claiming both ERC and PPP loans have evolved since the program was created.
While the PPP was the first to grab headlines and was a great lifeline for companies that were able to secure it, the ERC remains misunderstood. When the CARES Act was passed, companies could not receive a PPP loan and also claim the ERC – it was one or the other. Since most small and mid-size operators in the health and wellness sector received PPP, the ERC remained largely unexplored and unknown. Fortunately, the government rescinded this overlapping prohibition in December 2020. When the ERC was first passed, the program was only available for 2020 and was limited to a maximum refund of $5,000 per employee. The ERC has now been extended through the end of 2021 and offers a maximum refund of up to $33,000 per employee.
So, How Does the Employee Retention Credit Work?
Needless to say, the shifting rules surrounding the ERC have left many fitness center owners confused regarding their eligibility for this program.
Here’s how the ERC works in 2020 versus 2021. For 2020, businesses can receive a payroll tax refund of up to $5,000 per employee for the year. In 2021, that amount increases to $7,000 per employee per quarter. The credit amount is calculated based on wages and health benefits paid to certain employees.
Companies can determine their eligibility for the ERC based on one of two criteria:
- For 2020 eligibility: A gross receipts decline of 50% in any quarter over that same quarter in 2019. For 2021 eligibility: A gross receipts decline of 20% in Q1 2021 compared to Q1 2019 or a decline of 20% in Q4 2020 compared to Q4 2019.
- For either eligibility in either 2020 or 2021 (or both): An impact on operations by a state or local government order (e.g., COVID lockdowns, capacity limitations or social distancing guidelines).
In order to claim ERC, a company can pass either 1 or 2 above and does not need to pass both.
So, for each W2 employee in your location, your business can receive a payroll tax refund of up to $5,000 per employee in 2020 (Q2-Q4) and up to $28,000 in 2021 (Q1-Q4). If Congress extends the ERC beyond December 2021, the total refund opportunity may increase.
As an example, a mid-size fitness company with 100 employees could recoup up to $500,000 in 2020 and up to $700,000 per eligible quarter in 2021. That’s a total of $1 million for 2020 and $2.8 million in 2021.
It gets a bit complicated to define the eligible hours and wages for each employee, and that’s where outsourcing to a tax expert really comes in handy. A vendor can calculate the credit, prepare the necessary documentation and provide an audit-ready package.
Can You Still Claim the Payroll Tax Credit if You Operated at a Loss?
First, it’s important to understand the nature of the ERC. It’s not an income tax credit. It’s a payroll tax refund. So, don’t worry if you didn’t pay any income tax last year, as that will not change your ability to claim the ERC.
How to Get Help
At a time when business owners are struggling to keep their fitness centers operating, the demands of applying for the various government programs can get complicated. For example, although more than 53,000 fitness centers received a PPP loan in 2020, many others may have been too overwhelmed to apply.
The most important thing is to act now. Technically, companies can claim the ERC for up to three years. However, some of the documentation involves direct employee input. With the high rate of employee turnover in the fitness industry, it’s a good idea to gather all the necessary information while memories are fresh and the company has retained many of its employees that had been working in 2020.
As the industry continues to deal with the pandemic and its aftermath, they need all the help they can get to survive and thrive. Outsourcing to knowledgeable experts in the tax credit arena could play a huge role in securing the funds that will make this possible. With the pros on the case, fitness centers can concentrate their efforts on rebuilding their membership rosters and stabilizing their companies to ensure long-term future success.