Article written by:
Kaz Unalan, CPA
Director, Tax & Business Advisory Services

A lot of attention and focus over the last few weeks have been on the various SBA loan programs available; in particular, the Paycheck Protection Program that is part of the CARES Act. While we agree that the programs will provide significant relief and liquidity for restaurant operators, other provisions of the CARES Act should not be overlooked. Within the CARES Act are a number of current and retroactive tax law changes that will generate cash back to restaurant operators through tax refunds, tax credits and loans. Right now, we are in the midst of the traditional tax filing season for the calendar year 2019. We strongly recommend you review the provisions below with your tax advisor before filing your returns so you do not miss any opportunities. Below is a summary highlighting a number of important provisions to make note of not only for this year but prior years as well.

Qualified Improvement Property (QIP) Technical Correction

  • Congress addressed the much anticipated “restaurant/retail glitch” associated with the 2017 Tax Cuts and Jobs Act (TCJA). This rule previously prevented investments in QIP from qualifying for bonus depreciation. With the passing of the CARES Act, the recovery period for QIP is reduced from 39 years to 15 years, thus making it eligible for 100% bonus depreciation through 2022. This change is retroactive to January 1, 2018 forward.
  • Restaurant owners should be aware of this as it relates to filing 2019 tax returns as you want to make sure you address this prior to filing to avoid having to go back and amend your tax returns. This created an opportunity to increase depreciation deductions and reduce 2019 taxes. If this change increases a current year loss this will be of value related to the new loss carryback provisions mentioned below.
  • Related to the impact for the tax year 2018, taxpayers could amend previously filed tax returns to file for refunds. Alternatively, the related deduction for the 2018 change could be taken on your 2019 tax return by filing an accounting method change. The IRS recently issued Rev. Proc. 2020-23 that is favorable by way of expanding options for partnerships to amend their tax returns related to this change.

Net Operating Loss (NOL) Provisions

  • Losses from 2018, 2019, and 2020 can be carried back five years and applied against income taxes in those years to create income tax refunds and increase cash flow.
  • Under the pre-CARES Act tax law, taxpayers were only allowed to carry forward NOLs. This change may create a permanent tax benefit for taxpayers. Simply stated, tax rates in 2017 were higher than 2018 forward, so a permanent tax benefit exists with carryback opportunities in addition to cash flow generation.
  • Taxpayers will temporarily be able to offset 100% of taxable income with NOLs, as opposed to 80% of taxable income under the pre CARES Act law.

Excess Business Loss Limitations

  • Temporary suspension of excess business loss limitations for individuals under IRC Section 461(l) for tax years 2018, 2019, 2020 is allowed. As a result, taxpayers who were subject to excess business loss limitations on tax returns already filed for 2018 and 2019 may be able to file amended tax returns and claim refunds to generate additional cash flow. As a reminder, the excess business loss limitation capped business losses at $500,000 for married filing jointly, and at $250,000 for single taxpayers.

Changes to Interest Expense Limitations

  • Taxpayers subject to interest expense limitations under IRC Section 163(j) will be able to deduct interest expense of up to 50% of their EBITDA, a change from the current limitation of 30%. This change will be applicable for 2019 and 2020, for most taxpayers.
  • Partnerships will be able to utilize 50% of EBITDA limitation for 2020 only. For any interest expense that was limited on 2019 tax returns, partners will be able to deduct one half of the amount disallowed on their respective 2020 tax returns, irrespective of other limitation rules under IRC Section 163(j). The remainder of the disallowed 2019 interest expense will be subject to the normal allowance rules under IRC Section 163(j).
  • Because many taxpayers will not have taxable income in 2020, they can elect to use their 2019 EBITDA in computing any interest expense limitation for 2020.

Employee Retention Credit

Note: Not available if the taxpayer also receives a Paycheck Protection Program loan.

  • A fully refundable credit against the employer’s 6.2% share of Social Security taxes for businesses that, (a) are forced to fully or partially close their operations, or (b) remained open, but during any quarter in 2020, gross receipts were less than 50% of what they were for the same quarter in 2019.
  • Credit is available for qualified wages paid by qualified employers from March 13, 2020 through December 31, 2020.
  • The tax credit is equal to 50% of qualified wages paid to each employee for the quarter and is limited to $5,000 per employee ($10,000 in eligible wages times 50%).
  • For employers with 100 or fewer employees, qualified wages include all wages paid during the quarter for which the employer qualifies.
  • For employers with more than 100 employees, qualified wages only include those that are paid by the employer during the periods in which the employee is not working.

Employer Payroll Tax Payment Deferral

Note: Not available if the taxpayer receives a Paycheck Protection Program loan and that loan is later forgiven.

  • In addition to the tax credit against Social Security taxes described above, the new law will allow all employers to delay payments on their share of the 6.2% Social Security tax that would otherwise be due during 2020. One-half of the deferred payment will be due on December 31, 2021, and the remaining half on December 31, 2022.
  • A similar deferral is available for self-employed individuals.

Retirement Fund Withdrawals

  • Taxpayers will not be subject to a 10% penalty for early eligible withdrawals from retirement funds of up to $100,000. Any withdrawals will still be subject to income tax unless the distribution is repaid within three years, or the taxpayer can elect to spread the income over a three-year period. This could be an alternate source of liquidity to get through these uncertain times.

Outside of the CARES Act, it should be noted that there is an extension of time to file and pay all federal taxes that were due April 15, 2020. The new deadline is now July 15, 2020. This covers all taxpayers related to the April 15th deadline. First-quarter estimates for 2020 that were originally due April 15, 2020 were also extended to July 15, 2020, as part of the relief provided by the IRS. Most states have also followed suit and will allow an extension of time to file and pay until July 15, 2020.

Please contact members of GBQ’s restaurant services team if you have questions, and/or if you would like to discuss this information in detail. To view and download this summary in a PDF format, click here.

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