New Stimulus Relief: What it Means for the Restaurant Industry
New Stimulus Relief: What it Means for the Restaurant IndustryCapping a week filled with uncertainty, President Trump finally signed the Consolidated Appropriations Act, 2021 on Sunday December 27, 2020. The new law, which will be referred to as the “Relief Act” or “Act” throughout this article, contains a number of provisions that will provide much-needed assistance to restaurants and other industries hit hardest by the coronavirus pandemic.
It would be impossible to discuss each provision in the Act in great detail in a blog post. Instead, our intent is to provide a high-level overview of the sections of the Relief Act that are expected to have the greatest impact on the restaurant industry. To help pinpoint information that is most relevant to you, the sections are divided into digestible bites by category.
From a second round of the Paycheck Protection Program (PPP) to the extension of familiar tax credits, there’s something in the Relief Act for everyone. Let’s dive right in….
Deductibility of PPP Expenses!
Tax Deductibility of Expenses Paid Using Forgiven PPP Funds
What is it? The question of whether PPP expenses would be tax deductible was perhaps the most talked about tax provision since the Qualified Improvement Property “glitch”. Despite Congress’ stated intent to allow a tax deduction for PPP-funded expenses such as payroll, the IRS disagreed and issued guidance in 2020 asserting that no tax deduction would be allowed for expenses paid for with forgiven PPP loans. The IRS guidance was an attempt to eliminate the double benefit that taxpayers would receive if they were able to take a tax deduction for expenses paid for by the government.
Prior guidance: Under recent IRS guidance, no tax deduction is allowed for expenses paid using forgiven PPP funds.
New law: Expenses paid using forgiven PPP funds are tax deductible!
Favorable rule applicable to owners of restaurants that operate as LLCs or “S” Corporations: In an ironic twist, active* owners of restaurants that are taxed as LLCs or “S” corporations may find themselves unable to benefit from tax deductions generated by PPP expenses on their 2020 tax returns. If the combination of PPP expenses and losses from operations create a 2020 tax loss for the restaurant, active owners can only deduct those losses to the extent they have “basis”. Owners that have taken distributions or been allocated losses in prior years may find that they lack basis to claim 2020 tax losses on their personal tax returns. In such a case, the losses are carried forward and generally become deductible when basis is restored in a future tax year. Under a favorable provision in the new law, basis is restored (increased) by the amount of PPP loan forgiveness. For restaurants that have PPP loans forgiven in 2021, owners will be made “whole” over a two-year period: they will increase basis in 2021 equal to the amount of PPP loan forgiveness, which in turn will free up suspended tax losses generated in 2020 by an equal amount of deductible PPP expenses. For restaurants that obtained loan forgiveness in 2020, the basis increase occurs in 2020, allowing owners to benefit from deductible PPP expenses on their 2020 personal tax returns.
*Rules applicable to passive owners are beyond the scope of this article.
2nd Round of PPP Loans
PPP Second Draw Loans
What is it? Additional funding generally intended to cover payroll and other costs incurred by small businesses that are still struggling as a result of the pandemic. As a result of lobbying efforts by the National Restaurant Association and others, the rules for the second round of PPP loans again contain special carve-outs for the restaurant and hotel industries. Thus (and depending on the facts), restaurants may receive more favorable PPP benefits than companies in other industries.
Can you get a second bite at the apple? Yes! Unlike the provisions of the CARES Act, the new law allows hard-hit businesses to obtain a second PPP loan provided their first PPP loan has or will be used up by the time the new loan is disbursed.
What about first-time borrowers? The second round of PPP loans is open to all eligible borrowers, including borrowers that did not receive a PPP loan under the CARES Act.
Who can apply and when? Restaurants with 300 or fewer employees per location can apply for a first- or second- time PPP loan under the second draw (reduced from 500 employees under the CARES Act). Similar to the CARES Act, affiliation rules are waived for businesses with an NAICS Code beginning with “72”. Unlike the CARES Act, borrowers must demonstrate proof of a decline in gross receipts (see next question).
Do you have to demonstrate a decline in business? Yes. Generally speaking, the new law requires businesses to demonstrate a 25% loss in gross receipts for any quarter of 2020 when compared to the same quarter in 2019. Special rules apply to businesses that were not yet in operation in the corresponding 2019 quarter.
How much can you borrow? Restaurants can borrow the lesser of 3.5 times average monthly payroll costs or a maximum of $2 million ($10 million under the CARES Act) The use of a 3.5 multiplier is another special carve-out for the restaurant industry under the new law; other industries continue to use the 2.5 multiplier that applied under the CARES Act (including loans to restaurants under the CARES Act). For purposes of computing average monthly payroll costs, borrowers can choose between using calendar year 2019 or the one-year period prior to the date the loan is made.
What can you use PPP loan funds for to qualify for full or partial forgiveness? Under the CARES Act, forgivable costs were limited to payroll costs, rent, covered mortgage interest and utilities. The new law expands this list to include:
- Covered operations expenditures, including payments for business software or cloud computing services necessary to keep business operations running (i.e., HR, accounting, payables, inventory and other similar functions).
- Covered property damage costs attributable to looting and vandalism during public disturbances that occurred during 2020.
- Covered supplier costs, including perishable inventory.
- Covered worker protection expenditures necessary to adapt a business so it complies with mandated COVID-19 sanitation, safety or social distancing standards. In a restaurant setting, this could include funds spent on the installation of drive-through windows, physical barriers such as sneeze guards and reconfiguration of dining rooms to comply with social distancing requirements.
Are loans issued under the second round of funding forgivable? Yes! Similar to the rules applicable to the original PPP loans, borrowers can obtain full forgiveness if they spend at least 60% of the loan proceeds on payroll costs.
Highlights of PPP changes applicable to restaurants include:
|First Round: 2020||Second Round: 2021|
|Maximum amount that can be borrowed||2.5 X avg monthly salary, up to $10m||3.5 X avg monthly salary, up to $2m|
|Employee counts for “small business” eligibility||500 or fewer per location||300 or fewer per location|
|Eligibility for a second PPP loan||No||Yes|
|Decline in gross receipts required||No||Yes. Must have a 25% loss in gross receipts for any quarter of 2020 when compared to the same quarter in 2019|
|Covered period||8 or 24 weeks*||8 or 24 weeks|
|Eligible expenses||Payroll costs, rent, covered mortgage, utilities||Same + 4 new categories – see above|
|Deductibility of PPP expenses||Yes!||Yes!|
* Depends on date the first round PPP loan was received.
Action Steps: Determine whether you meet the eligibility requirements for a second draw PPP loan and contact your bank to find out when they will open the application process.
Employee Retention Tax Credit
Significant Enhancements and Extension of the Employee Retention Tax Credit (ERTC)
What is it? The ERTC is a fully refundable payroll tax credit designed to encourage businesses to retain and compensate employees during periods in which businesses are not fully operational.
Who is eligible for the ERTC? Generally speaking, restaurants whose operations are fully or partially suspended as a result of government orders or that have experienced a decline in gross receipts compared to 2019 are eligible for the ERTC.
Can you claim the ERTC if you receive a PPP loan? Yes! One of the most favorable provisions in the new law allows taxpayers to both receive PPP loans and claim the ERTC. This overlap was not permitted when the CARES Act was originally enacted, and restaurants in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERTC. Importantly, the new law makes the ability to claim the ERTC and receive PPP loans retroactive to March 12, 2020. As a result, restaurants that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERTC credits for 2020 and 2021.
Which wages qualify for the ERTC? The answer depends on a restaurant’s status as a “large employer” (see below). Eligible restaurants that are large employers can only claim the ERTC for wages paid to employees for the time they are not providing services. Smaller eligible restaurants, on the other hand, can claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine large employer status to an employee count of more than 500 (previously more than 100). This favorable change will broaden the number of restaurants that can claim the ERTC for all wages paid to employees, including wages paid to employees who are providing services. Importantly, qualified healthcare expenses count as wages. As a result, if a business has furloughed employees but continues to pay their health insurance, the business can claim the ERTC.
Can the same wages be used for the computation of both the ETRC and the amount of PPP loan forgiveness? No. Simply put, there is no double dipping. Wages used to claim the ERTC cannot also be counted as payroll costs for purposes of determining the amount of PPP loan forgiveness, and restaurants that want to benefit from the ERTC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent a restaurant does not have sufficient wages, strategic planning will be needed to generate maximum benefits.
Highlights of changes made to the ERTC:
|Prior Law: 3/13/20 – 12/31/20||New Law: 3/13/20 – 12/31/20||New Law: 1/1/21-6/30/21|
|Interplay with PPP loan||No ERTC if taxpayer received a PPP loan||Taxpayers that receive a PPP loan can claim the ERTC, but double dipping is not allowed|
|Maximum creditable wages per employee||$10,000 per year||$10,000 per year||$10,000 per quarter|
|Maximum credit||Up to $5,000 per employee||Up to $5,000 per employee*||Up to $14,000 per employee*|
|Threshold to be considered a “large employer” (based on average full-time employees in 2019, and considering aggregation rules)||More than 100||More than 100||More than 500|
* Potential total credit under the new law = $19,000 over 2020 and 2021.
Action Steps and More Details: Second to the deductibility of PPP expenses, the ERTC may be the next most significant provision in the new law relevant to restaurants. If you did not consider the ERTC in 2020 (or were not eligible to consider the credit because you obtained a PPP loan), the retroactive ability to benefit from both PPP loans and the ERTC is a powerful reason to consider the ERTC for 2020. Looking ahead to 2021, the enhanced amount of the credit for wages paid during the first two quarters of 2021 provides yet another strong reason to consider the ERTC.
Provision That May Indirectly Benefit You
100% Tax Deduction for Business Meals Provided by a Restaurant
What is it? An enhanced tax deduction is temporarily provided to businesses for expenses associated with “business meals,” such as meals provided to employees or business associates. To claim a deduction, an employee of the business must be “present” at the furnishing of the meal and the expenses cannot be lavish or extravagant.
Prior Law: Business meals are only 50% tax deductible.
New Law: Business meals become 100% tax deductible for tax years 2021 and 2022, so long as they are provided by a restaurant.
The intent is clear, but how will the provision be applied during continuing shutdowns? This provision was enacted to encourage businesses to patronize restaurants as they emerge from the pandemic. Although we all hope that face-to-face business meals will once again become part of our business culture in 2021, the reality is that we are still facing mandatory shutdowns and distancing requirements. Let’s hope that forthcoming explanatory guidance provides that a “virtual presence” will suffice to allow a 100% business deduction for meals shared during Zoom or Teams meetings. We’ll keep our eyes on this; stay tuned for more details as we learn them.
Other Provisions That May Be Applicable to You
Work Opportunity Tax Credit (WOTC) Extension
What is it? A federal tax credit* is available to employers for a portion of wages paid (or incurred) to newly hired employees from certain targeted groups such as ex-felons or welfare recipients. While quick service restaurants typically generate significant WOTC credits, other restaurant sectors can also generate the credits, most frequently with respect to wages paid to back of the house employees.
Prior Law: The WOTC credit was slated to expire with respect to wages paid to eligible employees that begin work after December 31, 2020.
New Law: The WOTC credit has been extended for five years and can be claimed for wages paid to eligible employees that begin work after December 31, 2020 and before January 1, 2026.
Action Steps: If you are not already taking advantage of the WOTC credit, now would be a good time to explore the potential tax credits you can generate for wages paid or incurred in 2021–2025. Note that due to the employee certification process required to claim the WOTC credit, you can only claim credits for earlier tax years if you have already started the certification process. Restaurants that have not previously taken advantage of the WOTC credit can claim credits for 2021–2025 only.
Empowerment Zone Credit (EZ) Extension
What is it? The EZ is a federal tax credit* available to employers for a portion of wages paid (or incurred) to employees that both live and work in designated empowerment zones (typically urban renewal areas). Restaurants in all sectors that are located in urban renewal areas are candidates for the EZ credit. The EZ credit was recently retroactively extended to include wages paid or incurred in 2018, 2019 and 2020.
Prior Law: The EZ credit was slated to expire with respect to wages paid to eligible employees that begin work after December 31, 2020.
New Law: The EZ credit has been extended for five years and can be claimed for wages paid to eligible employees that begin work after December 31, 2020 and before January 1, 2026.
Action Steps: If you are not already taking advantage of the EZ credit, now would be a good time to explore the potential tax credits you can generate for wages paid or incurred in 2018–2025. Importantly, if you are eligible for the EZ credit but didn’t claim it in either 2018 or 2019, you can amend your earlier tax returns to take advantage of the credit.
Indian Employment Credit (IEC) Extension
What is it? The IEC is a federal tax credit* available to employers of American Indians for a portion of qualified wages and health insurance paid (or incurred) to employees that both work in, and live in or near, an Indian reservation. Restaurants in all sectors that are located within an Indian reservation qualify, and there are reservations throughout the United States. Like the EZ credit, the IEC credit was recently retroactively extended to include wages paid or incurred in 2018, 2019 and 2020.
Prior Law: The IEC credit was slated to expire for tax years beginning after December 31, 2020.
New Law: The IEC credit has been extended for one year and will now expire for tax years beginning after December 31, 2021.
Action Steps: If you are an eligible employer that is not already taking advantage of the IEC credit, now would be a good time to explore the potential tax credits you can generate for wages paid or incurred in 2018-2021. Similar to the EZ credit, if you are eligible for the IEC credit but didn’t claim it in either 2018 or 2019, you may be able to amend your earlier tax returns to take advantage of the credit.
Extension of Shortened Federal Tax Depreciation Lives for Property Placed in Service on Indian Reservations
What is it? Accelerated lives that are used to compute tax depreciation for assets used by businesses located on Indian reservation property. These lives were especially beneficial to businesses prior to “bonus” depreciation, as businesses located on Indian reservations could write off the cost of assets quicker than similar businesses not located on a reservation.
Prior Law: Shortened federal tax depreciation lives that apply to property placed in service on qualified Indian reservation property were slated to expire for property placed in service after December 31, 2020.
New Law: Shortened federal tax depreciation lives have been extended for one year and will now expire for property placed in service on qualified Indian reservation property after December 31,2021.
Impact of the Extension: Since most restaurant assets, including Qualified Improvement Property, are eligible for 100% bonus depreciation in 2021, shortened depreciation lives for assets placed in service on Indian reservation property are not likely to have much of an impact. The largest impact will be felt with respect to 39-year property, such as buildings and exterior improvements, whose lives are shortened to 22 years.
*Generally speaking, the WOTC, EZ and IEC credits can offset up to 75% of the federal tax liability of a restaurant taxed as a corporation or of the owner of a restaurant taxed as an LLC or an “S” corporation.
The tax leaders in BDO’s restaurant industry group can help you maximize your benefits under the Relief Act. Reach out here for a complimentary consultation.
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