While businesses coast to coast reel from the financial and emotional impact of the COVID-19 coronavirus pandemic, few have been affected more adversely than restaurants. Uncertainty in the restaurant industry could endure for months, maybe longer.
If there is any good news to share, it is about the many different government programs that now exist to help businesses survive this unprecedented socioeconomic crisis. As numerous coronavirus relief programs are being enacted on the federal and state levels, here are some of the major ones the restaurant industry should consider taking advantage of.
COVID-19 Legislation and Tax Policy Changes
Paycheck Protection Program (PPP)
Administered by the Small Business Administration (SBA), the PPP provides $349 billion in new lending capacity under the SBA’s Section 7(a) loan program. The program was created to help small businesses (fewer than 500 employees) with funds to pay up to eight weeks of payroll costs, including benefits. Funds can also be used to pay mortgage interest, rent, and utilities. The maximum loan amount available to each qualifying business is the lesser amount of
- 2.5 times the average monthly payroll costs during a specific period (calendar year 2019 for most)
- $10 million
Restaurants and franchises are waived from the SBA’s current affiliation rules within certain criteria – great news for entities with private equity investors. As an example, a private equity-owned restaurant group might qualify for the PPP by having fewer than 500 employees per location. Without the waiver, SBA affiliation rules could have combined that restaurant group with other restaurant groups owned by the PE firm, disqualifying it from the program.
Due to the relaxed qualifications afforded to restaurants, we believe that the PPP could be the fastest and most efficient way for a restaurant to gain access to cash. Moreover, a PPP loan may be fully or partially forgiven if the restaurant appropriately uses the loan to continue paying employee salaries and benefits and other costs like rent and utilities (specific rules limiting forgiveness amounts by expense type apply).
FFCRA Tax Credits for Employers and the Self-Employed
Signed into law on March 18, the Families First Coronavirus Response Act (FFCRA) provides employers tax credits against the employer-provided portion of FICA for those covering paid time off for employees, up to $511 per day paid to employees caring for themselves or $200 per day for those caring for family members or children home from school. The credits are refundable to the extent that they exceed the employer’s payroll tax and will be in effect through Dec. 31, 2020.
Employee Retention Credit
On March 31, the Treasury and IRS launched the Employee Retention Credit, designed to encourage businesses to keep employees on payrolls. An alternative to the PPP, this refundable tax credit is 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19 (i.e., the maximum per-employee credit is $5,000).
Requirements to qualify for this credit include the employer’s business being fully or partially suspended by government order due to COVID-19 during a calendar quarter, or that gross receipts are less than 50 percent of the comparable quarter in 2019. Eligibility measures are calculated each calendar quarter, and once the employer's gross receipts exceed 80 percent of a comparable quarter in 2019, the employer, at the end of that quarter, would no longer qualify for the credit.
We believe the Employee Retention Credit is a very good option for any restaurant still paying its employees despite COVID-19 disruption. It is important to note that this credit is unavailable if the restaurant is extended a loan under the PPP.
Payroll Tax Deferment
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows employers to defer their share of 2020 Social Security payroll taxes. Half of these deferred payroll taxes are payable by Dec. 31, 2021, with the other half due Dec. 31, 2022.
While this is a viable option in helping restaurants retain some liquidity, it is only a deferral and does not relieve the restaurant of payment responsibility. Consequently, restaurateurs could face a very hefty tax bill in both 2021 and 2022 if these tax payments are deferred. Additionally, payroll taxes cannot be deferred if the restaurant has secured a loan through the PPP.
SBA Economic Injury Disaster Loan (EIDL)
The SBA is offering Economic Injury Disaster Loans (EIDL) up to $2 million to provide coronavirus-related economic relief for small businesses in designated states and territories. These loans are being made available to small businesses and private non-profit organizations to provide working capital and ease economic injury due to a temporary loss of revenue. Funds can be used to pay fixed debts, payroll, accounts payable, and other bills. There are specific rules to follow if applying for both EIDL and PPP loans.
The interest rate for these SBA loans is 3.75 percent for small businesses. Loan terms are determined on a case-by-case basis, based upon each borrower’s ability to repay. Long-term repayments of up to 30 years can help keep payments affordable.
Modified Tax Provisions That Can Help
Along with the governmental programs developed specifically to address coronavirus-related financial hardship, the CARES Act also contains various tax provisions that could provide significant tax benefits to restaurants and other hospitality businesses. The tax benefits delivered by these provisions will depend upon each taxpayer’s specific facts, including legal entity structure.
Qualified improvement property (QIP) is generally, with certain limitations, improvements made to nonresidential real property after the date when the property was first placed in service. The CARES Act corrects a drafting error contained in the Tax Cuts and Jobs Act of 2017 (TCJA), retroactively making QIP 15-year property that is eligible for 100 percent bonus depreciation. While state depreciation rules may differ, this correction could be a big benefit to multi-unit operators making property improvements, allowing those businesses with QIP expense in 2018 and 2019 to potentially file amended federal income tax returns.
For C corporations, any net operating losses (NOLs) incurred from 2018, 2019, and 2020 can be carried back five years to generate tax refunds. While TCJA limited NOLs to 80 percent of income, the CARES Act removes this limitation. For restaurants that have been profitable in recent years, but will not be profitable in 2020 due to coronavirus-related revenue losses, this is a good way to obtain a refund of prior-year taxes. Additionally, the Act postpones the application of the excess business loss limitation of Internal Revenue Code (IRC) Section 461(l) applicable to pass-through business owners and sole proprietors to tax years beginning after Dec. 31, 2020. Accordingly, all restaurants that incurred a tax loss in 2018 or 2019 should review their facts to see if an NOL carryback (or amended return) should be filed.
The CARES Act allows restaurants taxed as C corporations to recover any remaining AMT credits fully in tax years beginning in 2019. Alternatively, an election may be made to take the AMT credit fully in tax years beginning in 2018 if not yet filed.
The Section 163(j) limit of interest deductions is raised from 30 percent to 50 percent of adjusted taxable income for 2019 and 2020. However, since many restaurants are organized as partnerships for tax purposes, these entities should be careful as the 50 percent deduction only applies to 2020 and not to 2019 for partnerships. However, special rules apply to partners who receive excess business interest expense in 2019 – consult your tax advisor to see how these changes can help you.
Enhanced Deduction for Food Donations
The limitation for corporations on tax deductions for food donations has increased from 15 percent to 25 percent of taxable income. Food donations are a great way to give back to the community while earning an enhanced tax benefit that could immediately reduce income taxes currently due.
CohnReznick has seen a great deal of interest in the CARES Act loan and credit programs, as well as the tax changes, many of which will provide fairly immediate funding to restaurants. In fact, we recently established an SBA Task Force to assist companies through the rather rigorous application and financial documentation process to help secure PPP loans.
If your business is currently suffering financial hardship, the time to act is now. For example, the PPP application process began April 3, with demand for that and other programs already very strong. Even if you do not qualify for the PPP, the new job credit provisions in both the FFCRA and the CARES Act can provide immediate help to businesses negatively affect by COVID-19.
As always, consult with your tax advisor in reviewing these programs and determining which could work best for you based on your specific tax situation and business needs.
For additional information, visit CohnReznick’s Coronavirus Resource Center.