Last week the president signed into law the next COVID-related economic stimulus package, and many of it’s provisions will be especially helpful, or are even geared specifically towards assisting the restaurant industry. As many states go into a second phase of full or partial lockdowns with restrictions on indoor, or even outdoor dining, these provisions will likely be critical for many restaurant operations as we head into the winter months.
First up is the treatment of forgiven PPP loans on upcoming tax returns – a huge issue for taxpayers in all industries. For months the IRS has been avid that all expenses paid with forgiven PPP funds, or even PPP funds that were not yet forgiven but expected to be forgiven, would not be deductible for tax purposes on 2020 tax returns. This treatment would effectively make PPP loans taxable, which was not the intent of the CARES Act that originally established the Paycheck Protection Program. Congress has now clarified that expenses paid for with forgiven PPP funds will in fact be deductible for tax purposes – a major sigh of relief for business owners everywhere. This applies not only to the first round of PPP loans, but also the second round which is expected to be rolled out over the next several weeks.
Next is the deductibility of business meals. For many years, meals and entertainment were deductible at 50% of their cost, provided that they were for a business purpose and were not lavish or excessive. The 2017 Tax Cuts and Jobs Act nixed the entertainment portion, but kept meals at 50%. The new stimulus legislation ups the deductibility of business meals to a full 100% for tax years 2021 and 2022. This will hopefully spur additional restaurant spending by businesses, as they will be able to write off the full amount on their tax returns.
Several credits have been extended or expanded as well. The Work Opportunity Tax Credit (WOTC), which was scheduled to expire at the end of 2020 has been extended for an additional five years. This credit is available to all industries, but can be particularly useful for the hospitality industry which tends to do more hiring from the target groups required for credit eligibility.
The Employee Retention Credit (ERC), introduced by the CARES Act in an attempt to keep employees on the payroll through shutdowns, has also been extended and significantly expanded. Originally scheduled to expire at the end of 2020, the credit has been extended to cover wages paid from March 12, 2020 through June 30, 2021. In addition to the extension, the amount of the credit has been increased from 50% of qualified wages to 70% of qualified wages (this increase only applies to wages paid from January 1, 2021 through June 30, 2021.) Eligibility requirements have been relaxed as well – the original law mandated that a business must have been partially or fully suspended by COVID related lockdowns, or alternatively had gross receipts for any quarter in 2020 be less than 50% of gross receipts for the same quarter in 2019. For 2021, that threshold has been adjusted to 80% of gross receipts for the same quarter in 2019. While the gross receipts test is important, I believe the most critical change to the Employee Retention Credit is the new eligibility for PPP loan recipients to also claim the ERC. Under the original law, a business that received PPP funds could not also take advantage of the ERC. The new legislation reverses that rule, and allows for PPP recipients to claim the ERC, as long as the credit is not being claimed based on wages that were paid for with forgiven PPP funds, i.e. no double dipping. To top it all off, this change is retroactive to the beginning of the CARES Act, which will allow many businesses that received PPP funds to file amended payroll reports for 2020 and claim an Employee Retention Credit (provided they paid sufficient wages, over and above wages funded by PPP loans.)
That was a lot of information, and there will certainly be more questions and answers in the coming weeks. Stay tuned for key updates on everything we discussed here and more, and don’t hesitate to reach out to your Henry+Horne restaurant advisor in the meantime. For more information and resources on COVID-19, see our coronavirus page.
Austin M. Bradley, CPA