TEST - COVID FAQs: Restaurant Industry

TEST - COVID FAQs: Restaurant Industry

The global pandemic caused by the novel coronavirus (COVID-19) is having a profound impact on business operations around the world, and the restaurant industry is one of the hardest hit. Bars and restaurants were the first to be ordered by state and local governments to either reduce their operations to takeout or delivery or shut down entirely.

Here are some of the most frequently asked questions and resources to help restaurants in their immediate response and planning. We have also created a COVID-19 Crisis Response Center which houses our insights, webinars and guidance for businesses affected by the pandemic.

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A: COVID-19 has interrupted business operations across industries, but restaurants are uniquely affected by the pandemic.

There are steps some restaurants can take to mitigate the near-term impact of the pandemic. Restaurants should evaluate the possibility of pivoting to other services, including offering takeout, delivery and/or meal kits, and selling groceries, such as toilet paper or cleaning supplies, if customers order a minimum dollar amount of food. The latter notably utilizes restaurants’ broadline distributors, which may help the vendors’ own business.

Restaurants should also engage their vendors, such as third-party delivery companies, in negotiations on fees, requesting they be temporarily suspended or scaled back. Engaging vendors in conversations may also result in creative partnerships, such as barters, that keep both vendor and restaurant happy.

With the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, loans are also available to pay rent, utilities and salaries, subject to restaurants’ eligibility under the Paycheck Protection Program (PPP). While the PPP program’s initial funds are depleted, as of April 21, the Senate had passed an additional stimulus package that would allocate $484 billion in funding, including about $322 billion to replenish the PPP, $75 billion for hospitals and $25 billion for COVID-19 testing. The House was scheduled to vote on it on April 23.

Regardless of whether a restaurant has received a PPP loan, they should  negotiate rent payments with landlords, for example negotiating the use of one month’s rent from the security deposit and updating the security deposit language in the lease.

There are also options for economic relief through programs under the CARES Act stimulus, but eligibility and compliance requirements need to be reviewed thoroughly.

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A: The CARES Act offers a number of tax relief options discussed below.

The Act allows businesses to carry back net operating losses (NOLs) incurred in 2018, 2019 and 2020 five years. In the case of corporations, this will result in NOLs being carried back to tax years when their corporate tax rates were as high as 35%. The new law also enables businesses to utilize NOLs generated in prior years to offset 100% of taxable income for tax years 2019 and 2020, rather than the 80% restriction previously imposed as a result of the Tax Cuts and Jobs Act (TCJA).

The CARES Act also fixes the so-called “retail glitch” that came about due to an inadvertent wording error in the in the TCJA. Qualified Improvement Property (QIP) placed in service after January 1, 2018, is (finally) depreciable over a 15-year period and is eligible for 100% bonus depreciation.

The Act also increases the business interest expense limitation, commonly referred to as Section 163(j), from 30% to 50%, allowing businesses to deduct more interest expense and hence decrease their taxable income. Outside of the existing stimulus measures, companies should also consider tax relief measures that pre-dated the COVID-19 pandemic, such as the Empowerment Zone credit, a federal general business credit for a portion of the wages paid to employees who both live and work in designated empowerment zones. This credit expired at the end of 2017 but was recently extended retroactive to 2018. Taxpayers can amend their 2018 tax returns to claim this additional credit. 

Furthermore, if businesses are working to develop, improve and adapt products and processes, they may be eligible for Research & Development tax credits.

For more on QIP, read our insight “CARES Act Fixes the Retail Glitch to Make Qualified Improvement Property Eligible for Bonus Depreciation”

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A: The PPP was designed to encourage businesses to keep their employees on the payroll. Capped at $10 million or 2.5x average monthly payroll costs, it offers up to 8 weeks of payroll costs, including benefits, and can be used to pay rent, utilities and mortgages.

Due to high demand for PPP loans, in order for loans to be forgiven, as currently written, at least 75% of the PPP loan proceeds must be used during the 8-week period for payroll costs. However, because many restaurants are closed, this provision is impractical, and restaurants are lobbying to lower the requirement to 50% of the loan used for labor.  Additional lobbying efforts are underway to extend the 8-week forgiveness period for restaurants, who may still be subject to state-mandated closures at the end of their 8-week periods.
If provisions of the CARES Act do not provide the assistance necessary to maintain a company’s workforce, leadership teams are faced with difficult decisions. However, there may be some alternatives to the worse-case scenario of layoffs.

Many companies are implementing pay cuts across the board to save jobs, with higher reductions for higher salary brackets to protect the most vulnerable. If going this route, it’s critical that the leadership team lead by example and also commit to pay cuts.

Restaurants can also consider shortening the work week or open days to reduce capacity needs. If given the choice, some employees might opt for part-time work if it will save their job.
Some employers may also make the tough decision to delay or temporarily cut back on fringe benefits like 401(k) contributions, paid vacation or tuition reimbursements, in efforts to preserve salaries and health insurance.

In any scenario, open and clear communication with staff is critical during turbulent times when stress levels are already heightened. Minimizing uncertainty and being transparent about difficult decisions is key for individual wellbeing.

For more on this topic, view our April 1 webinar “Paycheck Protection Sba 7a Loan Program: What Restaurants Need to Know” here.

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A: Due to a combination of travel restrictions, stay-at-home orders and rising unemployment, almost all businesses will experience declining revenues due to the widespread impacts of COVID-19. Due to state-mandated closures, most restaurants will experience a liquidity crunch.

Restaurants should examine their current cash flow and make a realistic projection over the next three to six months to understand their expected capital requirements.

Beyond just reviewing profits and losses, it is crucial to focus on the balance sheet and determine the current cash conversion cycle, especially as suppliers and customers experience disruption themselves. Although some back-office functions may not usually be top of mind, restaurant owners need a clear picture of accounts receivable and the timeline for conversion to understand cash flow now and in the near future.

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A: The SEC has provided conditional relief for registrants that are affected by COVID-19 and are unable to file on a timely basis.

On March 25, 2020, the SEC issued a new order extending the due date by 45 days to file certain SEC disclosure reports, such as Forms 10-K or 10-Q. The exemptions granted relate to reporting and proxy delivery requirements for registrants and the new order modified exemptions to now cover filings due between March 1, 2020 and July 1, 2020. Registrants must disclose why they were unable to file on a timely basis.

For more on how to take advantage of the extension, read our report on the accounting and reporting impacts of COVID-19 here.

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A: A revised cash flow projection is essential for liquidity and business planning and enabling difficult decisions to be made as early as possible.

To start, conduct a 13-week rolling forecast. Restaurants will want to use it to see where they are going to be and to keep it rolling to make sure that they are where they should be, based on what their income and forecasted expenses are.

Businesses can also determine which current assets can be converted into an operating fund, and then use a run rate to assess how long that additional cash could last. It’s important to conduct stress tests of varying durations given the uncertainty around the length of the pandemic and its ripple effects. 

Restaurants should also perform financial forecasting including sensitivity and ration analyses, examining the overall threat to the business based on varying sales decrease scenarios.

Short-term measures to increase liquidity might include: 

  • Reducing variable costs

  • Halting non-essential purchases

  • Negotiating longer payment terms with suppliers

  • Negotiating a debt service holiday or covenant relief

  • Filing for bankruptcy protection

  • Applying for PPP or other low-interest government loan

  • Taking advantage of tax relief provisions


 

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