On Sunday, December 27, 2020, the president signed the Consolidated Appropriations Act, 2021. The Act combines a $1.4 trillion omnibus appropriations bill for the federal government for Fiscal Year 2021 and $900 billion of relief in response to the COVID-19 pandemic.
The Act extends several critical CARES Act programs that had been due to expire on December 31, 2020, including the Paycheck Protection Program (PPP) and unemployment assistance. It also clarifies rules and procedures developed by the various governmental agencies that implemented the CARES Act during the summer and fall of 2020. Finally, it adds a few new programs that may be of assistance to certain hospitality employers.
This article summarizes some of the key elements of the Act that are of particular interest to the hospitality industry and other small businesses.
Summary of Key Provisions
Reopening of the Paycheck Protection Program
The PPP was the most popular and well-known CARES Act program for small businesses. Although the first round of the PPP expired on August 8, 2020, the Act reopens the PPP for first-time borrowers.
Eligibility requirements for first-time PPP applicants are largely unchanged from the CARES Act:
- Employ fewer than 500 employees, though businesses in the hospitality industry may employ 500 employees per location;
- Meeting the SBA’s definition of a small business, a tangible net worth not exceeding $15 million, and net income not exceeding $5 million for the two full fiscal years prior to the application date.
- Certification that current economic conditions make the loan necessary to support the applicant’s ongoing operations.
The maximum size of a first time PPP is the lower of $10 million or 250 percent of the total average monthly payroll of the applicant; $35 billion has been set aside for first time PPP borrowers.
Paycheck Protection Program: Second Draw Loans
In addition to the reopened PPP, the Act also creates “Second Draw Loans” for borrowers who have already received and spent a PPP loan in 2020. These Second Draw Loans are smaller in size, and eligibility is more strictly limited.
Applicants for Second Draw Loans must:
- Employ fewer than 300 employees, though businesses in the hospitality industry may employ 300 employees per location;
- Demonstrate at least a 25 percent reduction in gross revenue in any of the first three quarters of 2020, compared to the same quarter of 2019; and
- Have used or will use the entirety of their first PPP loan.
Second Draw Loans have a maximum size of $2 million or 250 percent of the total average monthly payroll, although businesses in the hospitality industry may borrow 350 percent of their total average monthly payroll, capped at $2 million. Additionally, the Act reserves $25 billion in Second Draw Loans for small businesses that either (a) are located in low-income or moderate-income neighborhoods under the Community Reinvestment Act, with caps on individual loans at $250,000, or (b) have ten employees or fewer.
Paycheck Protection Program: Additional Flexibility For All Borrowers
The Act provides key flexibility to all PPP borrowers who have yet to spend their loan amount, whether an existing first-draw PPP disbursement that has not yet been spent, a new first-draw PPP loan to a new borrower in 2021 or a Second Draw Loan.
Firstly, the Act expands the existing list of uses of PPP funds to include the following:
- Covered Operations Expenditure: Payments for business software or cloud computing service that facilitates business operations, product or service delivery; the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting; or tracking of supplies, inventory, records, and expenses.
- Covered Property Damage Cost: Costs related to property damage, vandalism, or looting due to public disturbances that occurred during 2020 not covered by insurance or other compensation.
- Covered Supplier Cost: Payments for goods essential to the borrower’s operations at the time the expense was made and purchased pursuant to a contract, order, or purchase order in effect prior to the covered period of such PPP loan or, with respect to perishable goods, made at any time before or during the covered period of such PPP loan.
- Covered Worker Protection Expenditure: Any operating or capital expenses incurred to comply with federal, state, or local sanitization, social distancing, or customer and worker safety regulations, including purchases of personal protective equipment (PPE), physical safety barriers, additional or upgraded HVAC, expansion of outdoor areas (including outdoor dining), and drive-through facilities.
Additionally, the Act allows borrowers to choose the length of their “covered period” (i.e., the period during which funds spent may qualify for loan forgiveness). Under the old rules, a borrower could only choose either eight or 24 weeks. The Act now allows borrowers to choose the length of the covered period, as long as it is at least eight weeks and no longer than 24 weeks, which can allow borrowers the added flexibility to stagger or ramp up staffing under the PPP.
Paycheck Protection Program: Loan Forgiveness Simplification and Tax Treatment
Importantly, as laid out above, the Act adds to the number of forgivable uses of PPP loan proceeds while maintaining the threshold rule that 60 percent of any funds to be forgiven must have been spent on payroll.
The Act confirms that loan forgiveness will not be considered taxable income. Notably, the Act reverses IRS Revenue Ruling 2020-27 which stated that expenses otherwise deductible under the Internal Revenue Code would not be deductible if paid for using forgiven PPP proceeds. Under the Act, ordinarily deductible expenses that were paid for using forgiven PPP proceeds remain tax-deductible.
Further, the Act simplifies the loan forgiveness applications for loans under $150,000, although the rules for spending the PPP funds still apply. Applicants seeking forgiveness for loans under $150,000 must certify:
- The number of employees retained due to the PPP loan;
- The estimated amount of the PPP loan spent on payroll costs; and
- The loan’s total value.
That said, all PPP borrowers are advised to maintain accurate records and spend PPP proceeds in accordance with published guidelines, whether applying for forgiveness for first-draw PPP loans or Second Draw Loans and of any size.
Further Delay of Payment of Certain Employer Payroll Taxes
A Presidential Memorandum dated August 8, 2020, instructed the U.S. Treasury to defer the withholding and payment of the Old Age, Survivors, and Disability Insurance tax for the period from September 1, 2020, through December 31, 2020. Although the Memorandum required the obligation to be paid back before April 30, 2021, the Act extends this deadline to December 31, 2021. Interest and penalties on the deferral will now begin to accrue from January 1, 2022. It should be noted that the regularly-assessed employer portion of this tax will continue to be due through 2021 as normal: The delay refers only to the period from September 1, 2020, through December 31, 2020.
Extension and Expansion of the Employee Retention Tax Credit
Under the CARES Act, as extended by the Act, certain eligible employers can take a refundable payroll tax credit of 70 percent, up to $10,000 per quarter per employee, on wages paid between March 12, 2020, and June 30, 2021. Under the new rules set by the Act, employers must have: (a) fully or partially suspended operations during any calendar quarter due to government restrictions on commerce, travel, or group meetings, and (b) gross receipts in any calendar quarter be at least 20 percent lower than in the same calendar quarter the prior year.
Employers with fewer than 500 full-time employees can take the tax credit on the wages of all employees, regardless of whether an employee is furloughed. Employers with more than 500 employees may take the tax credit only on wages paid to employees for periods of time when the employee was paid but not providing services. Under the Act, employers who were not in existence for 2019 are eligible to claim the credit.
Employers who received PPP loans may still qualify for the Employee Retention Tax Credit, but with respect to salaries not paid for with forgiven PPP loan proceeds.
Provisions for unemployment assistance under the CARES Act, the Pandemic Unemployment Assistance (PUA), and Pandemic Emergency Unemployment Compensation (PEUC), were scheduled to expire on December 26, 2020. PUA provided unemployment benefits to workers who were traditionally not eligible for state-law unemployment benefits, including self-employed workers and independent contractors). PEUC provided an additional 13 weeks of benefits for those who had been eligible for but had exhausted all state-law benefits. The Act extends unemployment relief as follows:
- PUA is extended to March 14, 2021, although workers who have not exhausted PUA benefits before March 14, 2021, may be eligible to continue to receive benefits through April 4, 2021; and
- PEUC benefits are extended to cover 24 additional weeks for eligible workers who have exhausted applicable state law benefits, up from 13 weeks.
These benefits may be claimed through March 14, 2021, though existing PEUC claimants who already receive benefits as of that date may be eligible to continue to receive benefits through April 4, 2021.
A third program, the Federal Pandemic Unemployment Compensation (FPUC), originally provided eligible workers an extra $600 weekly unemployment benefit between April 5 and July 31, 2020. The Act reinstates the FPUC at a reduced $300 per week for each week of unemployment between December 26, 2020, and March 14, 2021.
Full Deduction of Business Meals
Prior tax rules provided for tax-deductibility of 50 percent of the cost of business meals provided by a restaurant. The Act now allows 100 percent of the cost of such meals to be deducted if paid for or otherwise incurred between December 31, 2020, and January 1, 2023.
New Grants for Shuttered Venues
The Act provides up to $15 billion in new SBA grants for eligible theater and venue operators, including promotors, producers, talent representatives, and movie and live theater operators. The grants will be available in two parts, are not subject to repayment, and are intended to cover up to 45 percent of an eligible operator’s 2019 revenue.
The first grants are capped at $10 million, and a second grant in spring 2021 will be valued at no more than 50 percent of the first grant. Applicants must have been in business on February 29, 2020, and must show decline in 2020 revenue of at least 25 percent. During the first two weeks of the initial grant period, priority will be given to applicants whose revenue between April 1, 2020, and December 31, 2020, is down by at least 90 percent compared to the same period in 2019. During the subsequent two weeks of the initial grant period, priority will be given to applicants whose revenues during the same period is down by at least 70 percent compared to the same period in 2019. After that, grants may be awarded to any eligible applicant. During the first two months of grant awards, at least $2 billion of the grants must be awarded to eligible operators with 50 or fewer full-time employees.
These grants may be used for payroll and payments to independent contractors, rent, utility payments, interest or principal on mortgage obligations (but not prepayment), interest or principal on debt incurred in the ordinary course of business prior to February 15, 2020, and ordinary business expenses (including licensing costs, state and local taxes, insurance, and advertising).
Emergency Economic Injury Disaster Loans Program Extension and Changes
The Act extends the Emergency EIDL program to December 31, 2021 (originally, this program was to expire on December 31, 2020). However, businesses are now subject to a cap of 500 employees to be eligible for EIDL assistance.
Applicants may still request loan advances of up to $10,000, but the Act lengthens SBA’s time to disburse the advance from three days (under the CARES Act) to 21 days, during which time the SBA will verify whether the applicant is an eligible borrower.
The Act extends or revives several key programs in the CARES Act that have been important in providing liquidity and stimulus to the hospitality industry, and provides a handful of new programs to address some of the CARES Act’s shortcomings. However, these provisions do carry significant risks and must be examined closely. As with the CARES Act and the programs that it created, we expect that regulatory guidance implementing new programs will be rolled out shortly. Consulting an attorney and/or tax professional before electing or foregoing any of the particular programs discussed in this article is strongly recommended.