Legislation and Tax Provisions That Can Help Restaurants Cope With COVID-19

By: Joel Boff, CPA, CGMA, Partner, David Meyrowitz, CPA, Partner, Ginny Boyce, CPA, Director, Lisa Caputo, CPA, Manager, CohnReznick

Shuttered dining rooms and “takeout-only” policies have become commonplace these past few weeks as the hospitality industry continues to cope with the devastating impact of COVID-19. Restaurateurs are also struggling to make sense of the operational changes necessary for re-opening. An April 20 Business Insider article reports that a National Restaurant Association survey found 8 million restaurant workers had been laid off or furloughed due to the coronavirus pandemic, with restaurants expected to see $240 billion in losses by the end of the year.

While this is all terrible news for the restaurant industry, a number of different programs have been enacted at the federal and state levels that offer coronavirus relief to eligible taxpayers, including restaurants. Here are some of these programs, along with updated tax policy changes, and how they can offer restaurant operators a bit of financial relief.

SMALL BUSINESS ADMINISTRATION PROGRAMS (PPP AND EIDL)

On April 24, the U.S. government passed a new $484 billion stimulus package that included $310 billion in new funding for the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) and another $60 billion for its Economic Injury Disaster Loan (EIDL) program. The initial $349 billion in funding for the PPP was exhausted in under two weeks as the SBA reported processing more than 1.6 million loans during that time.

Paycheck Protection Program (PPP)

The PPP is designed to help small businesses (fewer than 500 employees) with funding to pay up to eight weeks of payroll costs, including benefits. The funds can also be used to pay mortgage interest, rent, and utilities. The maximum loan amount for 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, and a PPP loan may ultimately be fully or partially forgiven if a restaurant uses the loan to continue paying salaries and benefits to employees and other costs such as rent (subject to specific rules limiting forgiveness amounts by expense type).  

Economic Injury Disaster Loans (EIDL)

The EIDL program provides small businesses with up to $2 million in coronavirus-related economic relief in certain states and territories. The loans are available to small businesses and private nonprofit 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% for small businesses and 2.75% for nonprofits. Loan conditions are determined on a case-by-case basis with repayment terms of up to 30 years.

​TAX DEFERMENT AND CREDIT PROGRAMS

Employee Retention Credit

The Employee Retention Credit is designed to encourage businesses to keep employees on payroll. 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 hurt financially by COVID-19 (i.e., the maximum per-employee credit is $5,000).

To qualify for this credit, the employer’s business must be fully or partially shut down by government order due to COVID-19 during a calendar quarter, or gross receipts must be less than 50 percent of the comparable quarter in 2019. Eligibility is calculated each calendar quarter. If 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. This credit is not available if a restaurant receives a PPP loan.

Payroll tax deferment

The Coronavirus Aid, Relief, and Economic Security (CARES) Act  permits employers to defer their share of 2020 Social Security payroll taxes, with 50% of the deferred taxes due by Dec. 31, 2021, and the other half due by Dec. 31, 2022. This payroll tax deferral would help restaurants retain some immediate liquidity but does not release them from payment responsibility. Consequently, restaurateurs could be dealing with a large tax bill in 2021 and 2022 if 2020 tax payments are deferred. If the restaurant is seeking a PPP loan, the tax deferral can only be extended up to the date the restaurant has secured this loan.

FFCRA tax credits for employers and the self-employed

The Families First Coronavirus Response Act  (FFCRA) provides employers with tax credits against the employer-provided portion of FICA for those covering paid time off for employees. The credit allows for up to $511 per day paid to employees caring for themselves or $200 per day for those caring for family members. The credits are refundable to the extent that they exceed the employer’s payroll tax and are in effect through Dec. 31, 2020.

MODIFIED TAX PROVISIONS UNDER THE CARES ACT

The CARES Act contains several tax provisions that could benefit restaurants and hospitality companies. The benefits ultimately received depend on certain facts, including the company’s legal entity structure.

Alternative minimum tax (AMT)

Restaurants and other businesses taxed as C corporations can fully recover any remaining alternative minimum tax (AMT) credits 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.

Food donations and other charitable giving

The limitation for corporations on tax deductions for food donations has increased from 15 percent to 25 percent of taxable income. Restaurants can donate food to their communities while earning an enhanced tax benefit that could immediately reduce income taxes currently due.

The COVID-19 pandemic has raised many questions about charitable giving, including the tax rules relative to employer-sponsored charities or establishing a relief fund to help employees impacted by the crisis. Read our answers to commonly asked questions about charitable giving in the age of coronavirus.  

Net operating losses (NOLs)

For C corporations, any net operating losses (NOLs) incurred in 2018, 2019, and 2020 can be carried back five years to generate tax refunds. The 2017 Tax Cut and Jobs Act limited NOL usage to 80 percent of taxable income. The CARES Act removes this limitation for these years, offering businesses the ability to obtain a refund of prior-year taxes. The CARES Act also delays 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 incurring a tax loss in 2018 or 2019 should review their facts to see if it makes sense to file an NOL carryback.

Section 163(j) business interest expense deductions 

The CARES Act raises the Section 163(j) limit of interest deductions 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. Special rules apply to partners receiving excess business interest expense in 2019, so we recommend that you consult your tax advisor to see how these changes could help you.

Qualified improvement property

Qualified improvement property (QIP), with certain limitations, generally refers to improvements made to nonresidential real property after the date the property was first placed in service. The CARES Act corrects a drafting error contained in the Tax Cuts and Jobs Act  (TCJA), retroactively making QIP 15-year property that is eligible for 100 percent bonus depreciation. While state depreciation rules may differ, this correction could help multi-unit operators making property improvements, allowing those with QIP expense in 2018 and 2019 to potentially file amended federal income tax returns.

As  always, we encourage you to consult with your tax advisor when reviewing these programs and determining their potential benefits to you based on your specific tax situation.
For additional information, visit our Coronavirus Resource Center.

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