On June 5, 2020, the Paycheck Protection Flexibility Act of 2020 was signed into law which provided ease to some of the restrictions that were originally enacted under the Paycheck Protection Program (PPP). While this was a major victory for the restaurant and hotel operators, the PPP loan forgiveness still presents challenges for business owners in these industries. As a result, this may require extensive planning and analysis by business owners in these industries in an effort to obtain PPP loan forgiveness as well as operate their restaurant or hotel effectively.
Changes from the Act
- The requirement that 75% of the forgivable costs must be “payroll costs” to 60% which effectively increases the amount of non-payroll costs (e.g. rent, utilities, mortgage interest) that are eligible for loan forgiveness from 25% to 40%.
- The covered period for forgiveness is increased from 8 weeks to 24 weeks, but borrowers still have the option to use a 8-week covered period.
- The deadline to restore full-time equivalents (FTE’s) and salaries or hourly wages back to the levels they were at on February 15, 2020 is extended from June 30, 2020 to December 31, 2020.
- Loan forgiveness will not be reduced for borrowers who are unable to hire individuals who were employees of the borrower as of February 15, 2020 AND are unable to hire similarly qualified employees for the unfilled positions on or before December 31, 2020
- Loan forgiveness will not be reduced if a borrower is unable to return to the same business level it was operating at on February 15, 2020 due to direct or indirect compliance with health regulations established by the Department of Health and Human Services, Center for Disease Control and Prevent, or the Occupational Safe and Health Administration.
While this is considered to be in compliance with the regulations from one of the three federal agencies listed above, it is interpreted that state and local governments who mandate shutdown orders based on the guidance from one of the federal agencies would be considered as indirect compliance under this exemption.
- Borrowers have 10 months from the end of the covered period to apply for loan forgiveness.
PPP Loan Forgiveness Challenges for Restaurants and Hotels
- Average Number of FTE’s During the Covered Period
Given that most restaurant and hotels were either closed or opened with limited capacity during the early stages of COVID-19, selecting the 24-week covered period may make the most sense for operators in these industries. The challenge with the 24-week covered period is unless exceptions or safe harbors apply, the amount of loan forgiveness will be reduced by the reduction in the average weekly number of FTE’s in comparison to the selected reference period which is either February 15, 2019-June 30, 2019 or January 1, 2020-February 29, 2020.
It is likely that most restaurant and hotel operators will see a reduction in their average weekly number of FTE’s as less employees were working at their restaurant or hotel during the early stages of the covered period due to closures or being opened at limited capacity.
- Restoring FTE’s
A borrower can obtain a safe harbor to not have their loan forgiveness reduced by any reductions to their average weekly number of FTE’s during the covered period if the FTE employee levels are restored to their February 15, 2020 level, no later than December 31, 2020. As many restaurant and hotel operators either anticipate not operating at the same business level they were at prior to COVID-19 or having to revamp their business model that results in a reduced workforce, restoring the FTE’s to the February 15, 2020 level may not be attainable.
While restoring FTE’s could be a challenge for many restaurant and hotel operators, many of these business may have a safe harbor reprieve on the FTE reduction if they are unable to return to the same business level due to direct or indirect compliance with health regulations issued by federal agencies.
- Reductions in Salaries and Hourly Wage Levels
A borrower’s loan forgiveness gets reduced if an employee’s average salary or hourly wage gets reduced by 25% or more during the covered period. The challenge this presents is many restaurants and some hotels have employees that earn their compensation in the way of tips. Tips earned by employees are counted as eligible payroll costs for loan forgiveness, but tipped wages that were previously earned do count towards the average salary or hourly wage that needs to either be restored or not reduced by greater than 25%.
As business owners in these industries continue to reopen, they may not see the same level of foot traffic that they had prior to COVID-19 which could result in a substantial reduction in the tips earned by employees. This could make it difficult for restaurants and hotels to both not reduce the average salary or hourly wages by more than 25% as well as meet the safe harbor of restoring salaries or hourly wages back to their February 15, 2020 levels.
- Unexpected Taxable Income in 2020
Under the CARES Act, the debt discharge of a PPP loan is excluded from the taxable income of the business owner federal income tax purposes. However Internal Revenue Service Notice 2020-32 states that if the forgiven loan isn’t included in a business’s taxable income, the expenses paid for the forgiven loan aren’t able to be included as a tax deduction.
With expenses that would normally be deducted on tax return now being considered as nondeductible, this could trigger higher taxable income for many business owners in 2020 and greatly impact a restaurant or hotel owner’s cash flow management in the near future.
Alternative Option: Employee Retention Credit
Restaurant and hotels that choose to forgo getting a PPP loan by August 8, 2020 can still apply for the Employee Retention Credit. The Employee Retention Credit is a refundable tax credit of 50% up to $10,000 in qualifying wages paid to each employee after March 12, 2020 and before January 1, 2021.
Employers are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A significant decline in gross receipts.
A significant decline in gross receipts begins:
- On the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.
The significant decline in gross receipts ends:
- On the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of its gross receipts for the same calendar quarter in 2019.
Qualifying wages depends on the average number of full-time employees for 2019 to determine which of the employees you can claim for the credit.
- Employers with < 100 employees: With an average of less than 100 employees in 2019, the credit is based on wages paid to all employees, whether the employee did or did not work.
- Employers with > 100 employees: With an average of greater than 100 employees in 2019, the credit is only applicaecble for wages paid to employees who did not work during the calendar quarter.
Business owners cannot take advantage of both the retention credit and the PPP loan even if the PPP loan does not qualify for any loan forgiveness. Restaurant and hotel owners that have not yet received a PPP loan should analyze whether the PPP loan or the employer retention credit makes the most sense before making a decision one way or the other.
For more information on the PPP loan, Employee Retention Credit, and/or any other COVID-19 related economic relief, please visit Aronson’s COVID-19 Resources Hub. Our tax specialists are also available for consultation on this for restaurant and hotels. Please contact Aaron Boker or one of our hospitality tax advisors at 240.364.2580 for more information.