As congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and signed into law by the President on March 27, 2020, one of the measures within the bill that has gained the most attention is the Paycheck Protection Program (PPP). The PPP loan program was designed to ease some of the economic hardship caused by the COVID-19 pandemic for small business owners by providing businesses with loans that could be forgiven as long as the funding is used over the eight weeks that follow the PPP loan origination date to pay for payroll, mortgage interest, rent, utilities, as well as if the employer maintains a similar full-time headcount pre-pandemic. Furthermore, while the IRS had originally indicated that the forgiven loans would not be treated as income for tax purposes, they have also recently clarified that the expenses related to amount forgiven would not be deductible.
While further guidance from the Treasury and Small Business Administration (SBA) is pending regarding the loan forgiveness calculation, below are some of the highlights of what is known thus far with how the PPP loan funding and loan forgiveness works:
- PPP loan is available for businesses, non-profit organizations, sole proprietorships, and self-employed individuals with no more than 500 employees or meeting the SBA industry size standard if greater than 500 employees.
- PPP loan amount is the lower of 2.5 times the average of either calendar year 2019’s monthly payroll costs or the 12 previous months capped at $10,000,000.
- Salaries per employee are capped at $100,000; owners in a partnership or LLC can claim up to $100,000 in guaranteed payments or self-employed earnings
- Independent contractors are excluded from “payroll costs”
- Must spend at least 75% of the loan proceeds payroll cost with the remaining 25% to fund the eligible expenses outlined above over the eight-week grace period.
- Must maintain a similar full-time headcount with a grace period up until June 30th to restore employment and salary levels to pre-pandemic status.
- Any portion of the unforgiven PPP loan will continue to accrue interest at a 1% fixed rate over the 2-year loan maturity.
- IRS Notice 2020-32: no deduction allowed for expenses normally deductible if the PPP loan funding of the expenses result in loan forgiveness and is excluded from income.
PPP Loan: Issues for Restaurants and Hotels
The PPP loan was intended to help rescue small businesses, such as those in the hospitality industry, which have seen tremendous layoffs and challenges to maintain employment levels.
Many restaurant and hotel owners could find that the loan is packaged with many restrictions and then have to contemplate how to spend the funds on payroll when many businesses are temporarily closed or opened in a limited capacity due to governmental orders. The main challenges could include how to spend at least 75% of the loan proceeds on payroll over an eight week along with trying to restore or maintain their employee headcount. Business owners could be faced with the dilemmas of continuing to pay their employees to stay home as well as the challenges in hiring or re-hiring employees when some workers are earning more from weekly unemployment benefits than their normal earnings.
Restaurant and hotel owners that are unable to meet the criteria for spending at least 75% of the loan proceeds on payroll and restoring their employee headcount could find themselves faced with qualifying for limited loan forgiveness and then a quick two year turnaround to repay the majority of the original PPP loan.
Possible Alternative Employee Retention Credit
The Internal Revenue Service (IRS) unveiled the Employee Retention Credit under IR-2020-62, which 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, including tax-exempt organizations, 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 applicable for wages paid to employees who did not work during the calendar quarter.
The credit is applied to the employer’s portion of FICA taxes and is fully refundable beginning with the second quarter. You would reduce your tax deposit on the quarterly 941 payroll returns by the credit and can submit a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim a refund for the excess amount.
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. Restaurants and hotels that determine they would get minimal to no benefit from the loan forgiveness that’s offered with the PPP loan could consider repaying the loan by May 14th (safe harbor date) which would make them eligible to claim the employer retention credit. Restaurant and hotel owners 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 301.231.6200 for more information.