On December 27, 2020 President Trump signed the Consolidated Appropriations Act, 2021 (referred to here as the Relief Act). The Relief Act contains a number of provisions that will provide much-needed assistance to the hospitality sector and other industries hit hardest by the coronavirus pandemic.
The most important changes include the following:
- A Second Draw of the Paycheck Protection Program (PPP) is available, with a larger allowable dollar amount for certain industries (this includes owners and/or operators of restaurants or hotels!);
- Tax deductibility of expenses paid using forgiven PPP funds and other exciting tax benefits; and
- Changes to eligibility and amount of Employee Retention Tax Credits (you can now get both the PPP and Employee Retention Tax Credits).
Key Second Draw PPP Updates:
When can you apply and what are the stipulations?
- Beginning on January 13, 2021 for Second Draw Borrowers
How do Second Draw Borrowers qualify?
- Have 300 employees or less
- Previously received the First Draw PPP Loan and will use, or has used, the full amount for authorized uses
- Have a reduction in gross receipts of at least 25% in any quarter in 2020 as compared to 2019: The Economic Aid Act did not provide a general definition of gross receipts for determining a borrower’s revenue reduction, so the new guidance makes the definition consistent with the definition of receipts in 13 C.F.R. Section 121.104 of SBA’s size regulations. Specifically, the interim final rule (IFR) from the small business administration defines gross receipts to include all revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. The IFR indicates that the amount of any forgiven First Draw PPP Loan shall not be included toward borrower’s gross receipts.
How much can you borrow?
- The Relief Act not only allows businesses to obtain a second round of PPP loans, it also allows those with an NAICS Code beginning with 72 (accommodation and food services sector) to qualify for up to 3.5 times their average monthly payroll.
- Maximum borrowing under the Relief Act is $2 million for Second Draw Borrowers.
Need more good news?
- The average monthly payroll calculation is very similar to the First Draw under the PPP, so if you plan to use 2019 payroll costs for the Second Draw you may not need to resubmit any payroll support for the Second Draw application.
Are there any changes to forgivable costs?
- You must still spend at least 60% on payroll costs (no changes there – to the percentage or definition), however there are added costs that can be included in the 40%, including:
- Covered operations expenditures, including payments for business software or cloud computing services necessary to keep business operations running (i.e., HR, accounting, payables, inventory, and other similar functions).
- Covered property damage costs attributable to looting and vandalism during public disturbances that occurred in 2020.
- Covered supplier costs, including perishable inventory.
- Covered worker protection expenditures necessary to adapt a business so it complies with mandated COVID-19 sanitation, safety, or social distancing standards. In a restaurant setting, this could include funds spent on the installation of drive-through windows, physical barriers such as sneeze guards, and reconfiguration of dining rooms to comply with social distancing requirements.
Is the covered period still the same?
- The Relief Act changes the covered period to the period that begins on the date of the loan origination and ends on a date that falls between eight and 24 weeks, which means you can select the covered period within that window.
Tax Provisions That Will Impact You:
PPP Loan Forgiveness:
- Prior guidance: Under recent IRS guidance, no tax deduction is allowed for expenses paid using forgiven PPP funds.
- Relief Act: Expenses paid using forgiven PPP funds are tax deductible!
Deduction for Business Meals:
- Prior law: Business meals are only 50% tax deductible.
- New law: Business meals become 100% tax deductible for tax years 2021 and 2022, so long as they are provided by a restaurant. Corporate catering here we come! We are still waiting on a little clarity for a virtual presence to ensure that 100% deductible will be allowed during video meetings.
Last, but not Least – What About Employee Retention Tax Credits?!
The good news just keeps on coming! Previously, if you took a PPP loan, you were not eligible for the Employee Retention Tax Credit (ERC). Well, times they are changing.
Who is eligible for the ERC and how does it work?
- The ERC is a payroll tax credit designed for businesses that either had a significant decrease in gross receipts (50%) or were fully or partially suspended due to applicable government orders. Restaurants and hotels typically fall into the category of partially suspended due to government orders; so, this is worth looking into even if you did not have a significant reduction in gross receipts.
How much is the credit?
- It is a refundable credit of 50% of qualified wages per employee up to $10,000 per employee for the period from March 13, 2020 to December 31, 2020 (maximum credit $5,000 per employee for the period).
- Beginning on January 1, 2021 the refundable credit is now 70% of eligible wages up to $10,000 per employee per quarter, for a maximum of $7,000 per employee per quarter from January 1, 2021 through June 30, 2021.
Can you claim the ETC if you also received a PPP loan… or two?
- The answer is yes! However, you cannot double dip by including eligible wages for the ETC that were funded with PPP loan proceeds. You can also take advantage of the ETC retroactive to March 13, 2020.
Are there different rules for different size employers?
- Yes! And that changed too. If you have more than 100 employees in 2020, you are considered a large employer (up to 500 in 2021). The rules for large employers are such that they can only claim wages paid to employees for time they are not providing services. Smaller employers can claim the credit for all employees.
One thing is certain – there are many new COVID relief programs that will assist the hospitality industry in maintaining a successful business going forward. It is very important that you research available programs and take advantage of those that will help your business. Should you have any questions, please contact your local professional at Clark Nuber.
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