This article was updated May 12, 2020.
The COVID-19 pandemic has had a sudden and unprecedented global impact on the economy, and the restaurant industry in particular. To help mitigate the impact, Congress and President Trump enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act (HR 748) on March 27, 2020.
This $2.2 trillion relief spending package was the largest in US history and the third relief package to that date in response to COVID-19. The act appropriated funding to serve the needs of individual workers and their company employers to offset widespread unemployment and, over time, relieve economic viability and uncertainty.
Through the efforts of restaurant and hotel industry advocates in Washington, D.C., such as the National Restaurant Association and International Franchise Association, specific wording changes were incorporated into the initial CARES Act that drove significant benefits for these industries that can provide relief for employees, operators, investors, and vendor partners. This includes forgivable loans, grants, tax incentives, and other programs provided by governments, trade groups, and companies.
Below, we breakdown the specific opportunities available to various groups in the restaurant industry through the CARES Act.
As mentioned, the interpretation and rules-setting process behind the CARES Act is highly fluid and changing constantly.
All Current Employees and Unemployed Individuals
Beginning last week and continuing for the next few months, eligible individuals began receiving tax credits, paid in cash in advance, of up to a $1,200, or $2,400 in the case of married filing-joint taxpayers, plus $500 for each qualifying child, for the 2020 tax year.
To receive the full credit, individuals must have an adjusted gross income (AGI) that doesn’t exceed $75,000 for single filers, $150,000 for married filing-joint filers, and $112,500 for head-of-household filers. Above those amounts, the credit is phased out by 5% for every dollar their AGI exceeds the threshold.
The intent is to accelerate receipt of these payment by individuals. This timing will be impacted at some level by whether an individual has a bank account.
Delayed Filing Deadline
Tax filing dates are delayed from April 15 to July 15, 2020. If filers are due a refund, they should still consider filing as soon as possible to access their funds quickly. However, they should be aware that if their 2019 income is higher than 2018, it could affect the amount of their payment check.
For 2020, individuals can now take penalty-free distributions up to $100,000 from qualified retirement accounts. Income tax from this can be spread over three years beginning in 2020. Taxpayers may recontribute to these accounts without contribution caps within three years to avoid the income tax.
In addition, required minimum distributions from retirement funds aren’t required for the 2020 tax year.
Current Restaurant Employees
Families First Coronavirus Response Act (FFCRA) (HR 6201), passed on March 18, 2020, laid out requirements for employers to provide sick and medical leave in response to the virus. Tax credits may be available to offset the FFCRA requirements.
The act stipulated that a full-time employee qualifies for up to 80 hours of paid sick leave if they’re experiencing COVID-19 symptoms or paid child care leave if their children's schools are closed or child care providers are unavailable.
See our FFCRA alert for more details on qualifications and eligibility. We recommend you consult with an employment law attorney if you have questions on the application of the FFCRA to your business.
Recently Unemployed Workers
The CARES Act also provides unemployment benefits for affected individuals.
To qualify, an individual must self-certify that he or she is unemployed, partially unemployed, or unable or unavailable to work due to COVID-19-related reasons, but otherwise able and available for work per state law.
Other key unemployment takeaways for the CARES Act include:
- Benefits were extended to a total potential period of 39 weeks, with certain restrictions.
- Gig workers, independent contractors, and the self-employed now qualify, though as of April 3, 2020, many states were confused on how to apply the CARES Act provisions to these employees.
- Unemployment insurance payments will be increased by up to $600 for up to four months.
- Waiting period to receive benefits was waived in all but some states, as of March 27, 2020.
- Funding was provided to support low-income housing energy assistance, community development, child care, deferment of student loan payments, and health care-related benefits.
- Some states are requiring employers to file for unemployment insurance on behalf of their employees to expedite the process.
- Guidance to file for unemployment can be found at Career OneStop’s website.
Small Business Loans
A significant part of the CARES Act is the funding of two loan programs—the new Paycheck Protection Program (PPP) and the existing Economic Injury Disaster Loan (EIDL)—intended to support small businesses and their employment through the crisis period.
Small Business Administrator (SBA) borrowers whose businesses have been impacted by the pandemic may delay CARES Act loan payments for six to 12 months, at the discretion of SBA lenders. EIDLs have variable loan terms based upon the financial condition of a company but can reach 30 years.
The PPP provides incentive for small businesses to keep workers on their payroll. Under certain conditions, these loans are forgivable and fully backed by the US government.
Under this program, $350 billion was initially approved in CARES Act legislation. Additional funding of $321 billion was approved as of April 24, 2020 for the popular loan program.
Restaurant and hospitality companies with up to 500 employees per physical location and in operation on February 15, 2020, can apply. Affiliate rules for entities owned by private equity firms still were in force as of April 15, 2020. Although companies in the hospitality and restaurant space with no more than 500 employees per location received a carve out in the final guidance, you should consult your attorney as to whether the affiliation rules apply.
Borrowers must certify that the loan is necessary due to economic conditions and that the funds will be used for the prescribed reasons. Significant penalties apply in the case of misuse or fraud, provisions for which were added by the SBA in the week ending April 3, 2020. Learn more in this article.
Reopening Terms and Conditions
While these loans can be helpful, industry advocates are pursuing other terms and conditions to help operators prepare for and implement reopening. These additional asks relate in part to the unforeseen time period over which restaurants have been forced to remain closed in the United States. They include:
- Extension of the period over which expenses can be measured and forgiven by the government
- Postponement of the date on which debt payments begin
- Extension of the loan amortization period from two years to either five or 10 years
- Adjustment of the 75-25 rule for payroll and other cost apportionment that expands the use of those funds for other expenses critical for reopening, such as non-payroll employee training and costs to restock food and other supplies
For those who secured loans, the conversation is now focused on how to calculate and determine loan forgiveness scenarios.
Your bank will be processing the loan forgiveness documents and submit them to the SBA. Transparency with your PPP lender will be helpful to help ensure you’re spending the funds to obtain the most forgiveness. However, the SBA has the final say for loan forgiveness and the ability to deny forgiveness even if proceeds are used for qualifying proceeds. In general: A loan granted under the program will be forgiven if used on allowable expenses over the eight-week period after receiving the loan. However, there’s some ambiguity with the criteria.
Learn more about exceptions to loan forgiveness, how forgiveness adjustments are calculated, and how forgiveness is granted in this article. Economic Injury Disaster Loan Program (EIDLs)
This is an existing disaster loan program expanded as part of the CARES Act so that it can be used for COVID-19 relief through December 31, 2020. The maximum loan is $2 million. Approval is based on credit history and ability to repay. It can’t be used in combination with PPP for relief from the pandemic’s impacts, but can be used in conjunction with an EIDL from a previous disaster.
The program includes favorable interest rates, longer loan repayment periods than PPP, and a favorable cash advance feature with an option to accelerate the receipt of part of the loan—up to $10,000 forwarded quickly upon application, with no repayment due if the EIDL is denied; however, if in this case a PPP loan is then obtained, this cash advanced will be deducted from the amount of the PPP loan forgiven.
Loans below $200,000 don’t require personal guarantees. Business property will be used as collateral on loans greater than $25,000. Loans greater than $200,000 require any owner of 20% or more of the borrower to provide personal guarantees.
For COVID-19, no loan forgiveness provisions are available for EIDLs. Loan proceeds can be used for payroll, supply chain, and other related expenses. As with PPP loans, additional use of these funds is being pursued with Congress.
To benefit from this program, businesses should apply directly to the Small Business Administration.
Other Notable CARES Act Provisions
The act includes the following tax relief for employers:
- Under the employee retention tax credit, payroll tax credit of 50% of wages during pandemic is available for up to a maximum of $10,000 of wages. This credit can’t be used in combination with PPP.
- The payment of the employer portion of the social security payroll taxes—6.2% of an employee’s wages—can be delayed for wages paid for March 27 through December 31, 2020. This deferral is available for wages until the date of any PPP loan forgiveness.
- Accelerated write-off of property improvement costs—this is a technical correction to the tax code related to Qualified Improvement Property (QIP). This now allows for bonus depreciation to be applied for tax purposes on QIP, absent other restrictions.
- Section 163(j) interest deduction limitations are loosened.
- 2018, 2019, and 2020 net operating losses (NOLs) of corporations and individuals are allowed to be carried back up to five years.In addition, the NOLs can offset up to 100% of net income, deferring the 80% limitation previously in place until tax years beginning after December 31, 2020.
- Corporations may accelerate recovery of alternative minimum tax credits. Deadlines apply.
- The corporate deduction of charitable contributions has increased to 25% of taxable income for 2020. This includes the enhanced charitable deductions that may be gained by donating food inventory. Learn more about this benefit in our article.
- The excess business loss rule for noncorporate taxpayers has been delayed to after 2020.
- There’s an exemption of excise tax for hand sanitizer related produced by distillers from December 31, 2019, to January 1, 2021.
Minority Business Agency Grants
The act also provides funding for education, training, and advising of minority business enterprises and their employees.
Other Non-CARES Act Support Sources
Franchisor Support Programs
Numerous larger franchisors have aggressively pursued COVID-19 fiscal support programs for franchisees of their systems–including McDonalds, YUM Brands (KFC, Pizza Hut, Taco Bell), Subway, Chick-fil-A, and Qdoba. More of these programs are being announced each week.
Other Support Funds
Some other funds include those offered by the National Restaurant Association, the Freelancers Union, and more.
We’re Here to Help
For more insight and strategies on how to prepare your business during this time, please contact your Moss Adams advisor.