The HEALS Act Could Leave Thousands of Restaurants in the Dark

    The National Restaurant Association is also warning of huge tax bills for struggling operators.

    Legal | August 2020 | Danny Klein
    Woman gets her food from a Chick-fil-A drive thru.
    Unsplash/Jeremy Bishop
    Drive thrus have provided a major lift to many quick-service chains.

    While a potential second stimulus package remains in flux, there is concern brewing for restaurants. One of the main levers for operators is another round of the Paycheck Protection Program. The Senate HEALS Act—in current form—allows small businesses with fewer than 300 employees and that can demonstrate a 50 percent loss in quarterly gross receipts over the previous year to apply for a second loan.

    Yet the cutoff is alarming, the National Restaurant Association said Monday. At that threshold level, more than half of operators (55 percent) would be left in the loan dark. And during a critical reopening-reclosing-reopening stage where thousands of restaurants are already fighting from the brink.

    In a letter to Congress Monday, the Association appealed for a 20 percent threshold, which would make 430,000 restaurant owners eligible for a much-needed second jolt of PPP aid.

    Doing so would ensure restaurants with a low gross revenue loss, but still facing bankruptcy, would be eligible.

    “The PPP got thousands of restaurants through the spring shutdown, but most are now open under strict business limitations and every month are wrestling with their bottom line,” Sean Kennedy, executive vice president for Public Affairs at the Association, said in a statement. “A second round of PPP will make or break these restaurants, so we encourage a bipartisan agreement to lower the qualifying threshold so that more of the struggling restaurants in our communities can have a fighting chance.”

    There’s an additional hurdle ahead, too. The Association warned Congress that without action, restaurants nationwide will soon be on the hook for thousands in unexpected tax bills. Because of an Internal Revenue Service decision made weeks after restaurants started accepting PPP loans, normally deductible business expenses are no longer deductible if the business pays the expense with a PPP loan that is subsequently forgiven.

    The Association said these tax liabilities are surprising and a “shock to thousands of restaurant operators.”

    It provided an example: A restaurant owner in Indiana who accessed PPP loans for his five small locations is facing a $182,000 tax burden. A Texas operator with six stores projects his tax bill to reach more than $1.3 million. Another in Greenville, South Carolina, with 300-plus employees, is considering closing if these taxes come due. To the Association’s point: Restaurants simply cannot afford to lose liquidity when cash on hand is already under tremendous stress.

    “This undermines the survival intent of the PPP program by imposing an unexpected tax liability of 25–35 percent on forgiven loans,” Kennedy said. “Restaurants that obtained a PPP loan to support employees and pay bills should not be facing unexpected, unintended tax burdens that further depletes their cash on hand. These PPP expenses should not face a massive ‘clawback’ in the form of federal taxes.”

    When Congress created the PPP in March, it made clear to small businesses, the Association said, forgiven PPP expenses would be tax deductible. Restaurants used PPP to keep employees on payroll, including the unique COVID-19 pause where concepts closed and still held staff in hopes of reopening and getting the loan forgiven.   

    However, the IRS now cautions about the “massive clawback,” as Kennedy noted.

    The Association strongly supports the Small Business Expense Protection Act. “This legislation codifies the intent of Congress, protects small businesses, and will not cost the federal government any additional money. We appreciate that the House of Representatives fixed the issue as part of the HEROES Act, and urge this provision be included in the next joint agreement.”

    In the Senate, the Small Business Expense Protection Act was introduced by Senator John Cornyn (R-TX) and is cosponsored by almost half of the Senate Finance Committee—including both Chairman Chuck Grassley (R-IA) and Ranking Democrat Ron Wyden (D-OR). The bill is also sponsored by Senate Small Business Committee Chairman Marco Rubio (R-FL).

    An anonymous restaurant franchisee in North Carolina said of the potential clawback, “This would cost us 30 percent of our emergency PPP loan, even as half of our restaurants are still losing money.”

    A family-owned operation in San Antonio added, “We pray that any legislation expanding or continuing the PPP reflects the protections found in the Small Business Expense Protection Act of 2020.”

    Losing tax deductibility based on PPP loan forgiveness would prove extremely costly, lamented a Houston-based brand. “In a time of severe cash shortages, increasing tax liability is completely nonsensible and counter to efforts to save the restaurant industry.”

    In Monday’s letter to Congress, the Association said it “appreciates that bipartisan consensus has developed for a number of items that are important to our industry.” Officials remain in talks as an August 7 recess date fast approaches. Meetings ran through the weekend as Democrats and Republicans attempt to iron out key language, notably around enhanced unemployment assistance, which has lapsed. The HEALS Act calls for a $400 reduction to the $600 weekly benefit. Democratic leaders have continued to push back. Here’s a look at what else could be involved.

    Something to consider about the unemployment shift as well is that, up until July 31, between 25–30 million Americans were receiving the Federal Pandemic Unemployment Compensation boost as part of the CARES Act. According to The NPD Group, this translated to $15–$18 billion per week put into consumers’ bank accounts. For context, total restaurant industry sales today are a bit less than $8 billion per week, David Portalatin, NPD food industry advisor and author of Eating Patterns in America, said.

    “Although the benefits don’t entirely evaporate on August 1 because of backlogs and late claims, the loss of the $600 a week unemployment benefit could adversely affect the restaurant industry,” he added.

    If anything, it’s another possible headwind to consider.

    Several provisions included in both plans would provide relief to restaurants and employees, including a second draw of forgivable PPP loans; improvements to Economic Injury Disaster Loans; longer-term loans with partial forgiveness; enhancements to the Employee Retention Tax Credit and the Work Opportunity Tax Credit; a tax credit for customer and employee wellness investments; a temporary increase to the business meal expense deduction; safe harbor protections from COVID-19 related litigation; and enhancements to COVID-19 testing and reporting.

    Naturally, the Association supports these components. Yet it brought up Monday the aforementioned setbacks: to ensure PPP loans are available to more than 45 percent of restaurants, and to protect operators from surprise PPP taxes.

    Since July 1, nearly 100,000 restaurant dining rooms have been shut down a second time by government mandates. The number of restaurants focused to close permanently continues to increase, the Association said, with the industry on track to lose $240 billion in revenue this year and 8 million employees.

    A new study from Aaron Allen & Associates, provided to Bloomberg News, suggested as many as 231,000 of America’s roughly 660,000 restaurants could shutter permanently. That projection would wipe out a third of the field.

    More than one in four workers who have lost their jobs during the pandemic are from the restaurant industry, more than any other sector. Last week, the Department of Commerce reported restaurants lost more than 34 percent of revenue in 2020’s second quarter.

    Historically, restaurants operate on particularly thin pre-tax profit margins of 4–6 percent, so even a small drop in revenue significantly threatens survival. “Magnified by the impacts of the COVID-19 crisis, restaurant sales and employment have been shattered,” the Association said.

    Put plainly, if the industry is unable to access the lifeline provided by a second round of the PPP, it will lose more jobs, close more restaurants, and fail to support communities.

    On Monday, the Independent Restaurant Collation released a new TV ad with support from Morgan Freeman and DoorDash calling on Congress to pass the RESTAURANTS Act—a more focused aid package. It will air in several markets across the country.

    The ad features a splice of normal restaurant sounds—laughter, clinking glasses—against darkened restaurants.

    The legislation was originally introduced in June by Sens. Roger Wicker (R-MS) and Kyrsten Sinema (D-AZ), alongside Reps. Earl Blumenauer (D-OR 3) and Brian Fitzpatrick (R-PA 1). It now has over 165 cosponsors in Congress with more legislators expected to formally sign. Last week, the bill gained 33 more House cosponsors and five additional Senate cosponsors, including Sens. John Cornyn (R-TX) and Amy Klobuchar (D-MN) and Reps. Kendra Horn (D-OK 5) and Francis Rooney (R-FL 19). 

    “Neighborhood restaurants we love are closing every day, knocking a rung off the ladder of someone’s American dream,” said Andrew Zimmern, a founding member of the Independent Restaurant Coalition, in a statement.  “Nearly 40 percent of independent restaurants are owned by immigrants. They are America’s favorite first job, the top employer of non-white managers, and employ over one million single moms. They are passion projects and community lifelines. They are our family, and we hope this ad reminds Congress of the stakes facing their communities during the pandemic. Independent restaurants simply cannot generate enough revenue to stay open and continue employing 16 million people around the country without relief from Congress.”

    The Act calls for the establishment of a $120 billion grant program run by the U.S. Treasury that small restaurants, bars, food trucks, caterers, and other similar establishments can use to cover various operating costs, including payroll, rent, mortgages, supplies, and PPE. Grant amounts are determined by comparing revenue from 2019 to revenue in 2020, and funds do not need to be repaid. 

    American Express, The Coca-Cola Company, Delta Air Lines, Hyatt Hotels, Resy, Sysco, and US Foods have expressed support.