Article by: Raffi Yousefian, CPA, Principal at RY CPAs

If you are one of the fortunate restaurants who received cash from the or some combination thereof, then you are probably wondering how and when you can (1) use this cash to strategically and efficiently grow your restaurant, (2) pay the least amount of taxes as legally possible, and (3) not have to return any of the funds.

In this article we have prepared a table that summarizes the most popular/frequent details and limitations for each of the programs mentioned above, along with an analysis of how to strategically leverage them for growth and taxes.

Eligible Use of Funds

Let us start with the eligible use for each funding source and how/when they need to spent:

General Requirement

RRF

PPP

EIDL

Covered/Spending Period

2/15/2020 -3/11/2023

Disbursement date through either 8 weeks or 24 weeks after the disbursement date

 

N/A

Forgiveness amount

Full proceeds

Full proceeds plus accrued interest

N/A

Repayment date if not forgiven

March 11, 2023

10 months after the covered period

2020 loans: 24 months after loan date

2021 loans: 18 months after loan date

Terms

Full repayment if funds are not used

5-year; 1% interest if not forgiven

30-year; 3.75% interest; 2.75% interest for nonprofits

Freeze on distribution of other assets

No

No

Yes, borrower must receive prior consent from the SBA before issuing distributions to owners, bonuses to owners, or loan repayments to affiliates or owners.

Taxability

Non-taxable for Federal; TBD for states

Non-taxable for Federal; varies for states

N/A

Eligible Use

 

 

 

Payroll Costs¹

Yes

Yes (must constitute at least 60% of the forgiveness amount)

Yes, but must be refinanced by the PPP if used for payroll costs during the PPP covered period.

Distributions

No

No

No

Repayment of partner/shareholder loans

No

No

No, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the shareholder/partner;

Refinance EIDL

No

Yes, if EIDL was received between 1/1/2020 and 4/3/2020. It’s required if the EIDL was taken during that date range and used for payroll costs.

N/A

Business mortgage principal

Yes

Yes, if mortgage is incurred before 2/15/2020

Yes

Business mortgage interest

Yes

Yes, if mortgage is incurred before 2/15/2020

Yes

Business mortgage prepayments

No

No

No

Other business debt principal

Yes

No

Yes, but not SBA, SBIC, or other federal debt besides IRS obligations.

Other business debt interest

Yes

Yes

Yes, but not SBA, SBIC, or other federal debt besides IRS obligations.

Other business debt prepayment or refinancing

No

No

No

Rent

Yes, if there’s a lease agreement

Yes, if lease agreement is before 2/15/2020

Yes

Rent prepayment

No

No

No             

Rent paid to a related party

Yes, if there’s a lease agreement

Yes, if the payment is less than the mortgage interest owed on the property during the covered period for that s

Yes, if it’s not a disguised payment of shareholder/partner loans or distributions.

 

Utilities

Yes, only if service began before 3/11/21

Yes, if service agreement began before 2/15/2020

Yes

Construction of outdoor seating

Yes

Yes, see covered worker protection expenditure**

No

Maintenance on walls, floors, deck surfaces, furniture, fixtures, equipment, and other assets

Yes

Yes, if it’s for covered operation, covered supplier cost, covered property damage, or covered worker protection expenditure

Yes

Food and Beverage/Inventory

Yes

Yes

Yes

Other normal operating supplies and expenses

Yes

No

Yes

Covered operation²

Yes

Yes

Yes

Covered supplier³

Yes

Yes

Yes

Covered property damage4

N/A

Yes

No

Covered worker protection5

N/A

Yes

No

Expansion or relocation expenses or purchases of fixed assets

No

No

No

 

The PPP columns above assume that your forgiveness amounts will not be reduced due to reducing the size of your workforce or your employees’ wages. That is beyond the scope of this article and more can be learned here.

Analysis

Now that we understand the eligible use of funds and limitations for each of these programs, we can assess how the programs can be used to catapult your growth while minimizing taxes.

First, our research shows that there is no required prioritization of how the program funds are allocated to expenses except that they cannot be double-counted; this provides a lot of room for planning. For instance, funds from revenue can be earmarked for re-investment such as opening a second location or distributions, while the funds from RRF, PPP, and EIDL are being used to cover operating expenses. We are unsure whether the SBA and Treasury intended to provide this opportunity. Be aware that if you have an EIDL and intend to earmark revenue for re-investment, then you will need to request prior approval from the SBA to be able to distribute or lend your non-EIDL cash outside of the business.

Consider this scenario: you use all your RRF cash to pay for the eligible operating expenses, and keep all of the cash from your sales as profit. For tax purposes, you can do the opposite! Your RRF cash can be considered a tax-free grant, while you use cash from sales to pay for the expenses, thus receiving a double benefit. If you are experiencing a labor shortage, then increasing your bonuses and salaries to attract talent using RRF funds will be beneficial because you are using RRF money to create more tax deductions, while generating more sales that will be pure profit.  All of this sounds too good to be true, but we believe the RRF was designed exactly for this purpose: to stimulate restaurant growth and hiring.

Second, you may have noticed that the PPP requires business debt and mortgage payments to be incurred before the pandemic, but the RRF and EIDL do not require this. This gives you the opportunity to take on new business debt to expand your restaurant and make payment towards that business debt using RRF or EIDL funds. However, for EIDL purposes, the debt cannot be federal debt such as loans from the SBA. Also, keep in mind, that prepayments on business debt and mortgage are not allowed, however overdue payments are allowed.

Third, according to the American Rescue Plan, RRF funds can be used for maintenance on walls, floors, deck surfaces, furniture, fixtures, equipment, and other assets. This language is fairly vague, and there is no fine print in the bill explaining what delineates maintenance from improvements. Therefore, this provides another opportunity for you to substantially and reasonably improve your assets using RRF funds. The IRS has clear-cut requirements for distinguishing fixed assets from repairs and maintenance, but the RRF does not. Therefore, we recommend speaking with your CPA before jumping to any conclusions here.

Finally, you should apply for PPP forgiveness and the ERC in tandem so you can strategically allocate payroll costs between the two programs to obtain the most benefit from the ERC and ensure full forgiveness of the PPP. We are managing this for our clients by not activating the ERC in the payroll system and applying for the tax credit through an amendment of the quarterly payroll tax returns instead.

Conclusion

After receiving an abundance of free money from the government, the natural tendency for owner-operators will be to splurge thinking that it benefits them for tax purposes. As you have seen from the table and analysis above, you do not need to do this to be in a better financial position. It is important to continue to monitor your restaurant’s margins and ensure operating profitability in case another disaster comes our way, or if you simply want to accumulate capital to reinvest into your growth. Feel free to contact us if you would like to discuss your situation.

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¹Here is a break-down of what is included in payroll costs for each program:

Payroll Costs

RRF

PPP

EIDL

Salary, Wages, and Commission to US employees

Yes, up to $100k annualized per employee

Yes, up to $100k annualized per employee

Yes

Cash tips

Yes, up to $100k annualized per employee

Yes, up to $100k annualized per employee including wages

Yes

Owners Compensation

Yes, up to $100k annualized

Yes, up to $100k annualized

Yes, excluding bonuses.

Self-employment income for partners

Yes, up to $100k annualized

Yes, up to $100k annualized

Yes

Qualified Wages used for ERC

No

No

N/A

Payroll Tax

No

SUI only

Yes

Vacation, parental, family, medical, or sick leave

Yes

Yes

Yes

Severance

Yes

Yes

Yes

Health Insurance

Yes

Yes

Yes

Cobra Premiums

No

Yes

Yes

Life and Disability Insurance

Yes

Yes

Yes

Retirement Benefits

Yes

Yes

Yes

 

²A covered operation expenditure is a payment for any 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.

³A covered supplier cost means an expenditure made by a borrower to a supplier of goods for the supply of goods that:

  • are essential to the operations of the borrower at the time at which the expenditure is made;
  • is made pursuant to a contract, order, or purchase order—(i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.

4A covered property damage cost is a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.

5A covered worker protection expenditure means an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act with respect to the Coronavirus Disease 2019 (COVID–19) expires; this includes:

  • the purchase, maintenance, or renovation of assets that create or expand
    • a drive-through window facility
    • an indoor, outdoor, or combined air or air pressure ventilation or filtration system
    • a physical barrier such as a sneeze guard
    • an expansion of additional
    • indoor, outdoor, or combined business space
    • an onsite or offsite health screening capability; or
    • other assets relating to the compliance with the requirements or guidance as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor
  • the purchase of:
    • covered materials described in § 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation;
    • particulate filtering facepiece respirators approved by the National Institute Occupational Safety and Health, including those approved only for emergency use authorization; or
    • other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and
    • does not include residential real property or intangible property