On December 27, 2020, the Consolidated Appropriations Act (the Relief Act) was signed into law, authorizing additional stimulus payments to individuals, extending enhanced unemployment relief and providing a variety of benefits for struggling businesses. The following is a brief overview of the provisions most relevant to restaurants.
Deductibility of Expenses Paid with PPP Loans
Last spring, the CARES Act created the Paycheck Protection Program (PPP), which offered forgivable loans to small businesses affected by the COVID-19 pandemic. The Act provided that forgiven loans would not be included in the borrower’s gross income for tax purposes. But despite Congress’ intent that expenses funded by PPP loans would continue to be tax-deductible — regardless of whether a loan is forgiven — the IRS ruled last year that no tax deduction would be allowed for expenses paid for with proceeds from forgiven PPP loans.
The Relief Act overrules the IRS, allowing borrowers to deduct expenses paid with forgiven PPP loans. It also includes special rules for businesses structured as LLCs or S corporations, making it easier for their owners to deduct these expenses.
Second Round of PPP Financing
The Relief Act sets aside $300 billion for an additional round of PPP loans. These loans are available to eligible small businesses that previously received (and spent) PPP loans. To qualify, a business must have 300 or fewer employees (reduced from 500 under the CARES Act) and must be able to show a 25% (or more) decline in gross receipts for at least one quarter of 2020 compared to the same quarter in 2019 (special rules apply to businesses that did not exist for all or part of 2019). The Relief Act provides that restaurants and other hospitality businesses are eligible if they have 300 or fewer employees per location.
Restaurants and other hospitality businesses may borrow up to 3.5 times their average monthly payroll costs (other types of businesses are limited to 2.5 times average monthly payroll), with loans capped at $2 million (compared to $10 million under the CARES Act). To calculate average monthly payroll, borrowers may use either the 2019 calendar year or the one-year period immediately preceding the loan.
As with the first round of PPP loans, to be eligible for forgiveness, borrowers must use at least“ 60% of second-draw” loans for payroll. But the Relief Act expands the permissible uses of the remaining 40% to include not only rent, utilities and mortgage interest, but also:
- Certain operating expenses, including software or cloud computing services for essential activities, such as accounting, inventory or human resources.
- Expenses related to property damage caused by vandalism or looting during public disturbances in 2020.
- Expenses for certain supplies, including perishable goods.
- Expenses for worker protection, such as installation of drive-through window facilities, air filtration systems or other measures necessary to comply with social distancing and other health guidelines.
Borrowers may select a “covered period” — during which PPP loan proceeds must be spent— ranging from eight to 24 weeks after the loan is made.
Related Read: Paycheck Protection Program Reopening for First and Second Draw Loans
In addition to the above, the Relief Act:
- Enhances the employee retention tax credit and extends the credit to PPP loan recipients (so long as it is not based on the same wages paid with PPP funds). This credit can be significant and generate refunds of 2020 and 2021 payroll taxes.
Related Read: New Stimulus Package Extends and Expands the Employee Retention Credit
- Simplifies forgiveness application procedures for loans under $150,000.
- Increases the business meal deduction from 50% to 100%, for meals provided by restaurants in 2021 and 2022.
Related Read: Final Meal and Entertainment Regulations — A Much-Needed Win for the Restaurant Industry
- Makes the Energy Efficient Commercial Building deduction permanent.
- Extends the work opportunity and empowerment zone credits through 2025.
For more information about PPP loans and other aspects of stimulus relief, please contact Rob Swenson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Restaurant Group.