Chefs prepare meals for patron at a franchise restaurant

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky

The American Rescue Plan Act of 2021 (ARPA) created the Restaurant Revitalization Fund (RRF) to provide restaurants with grants equal to their pandemic-related revenue loss, up to $10 million per entity (including affiliates) and limited to $5 million per physical location. Grant amounts are reduced by any Paycheck Protection Program (PPP) loan proceeds the applicant received. Eligible entities include restaurants, caterers, food trucks, bars, lounges, taverns, brewpubs, taprooms and tasting rooms. The Small Business Administration (SBA) is administering the fund similar to the PPP loan program.

The web application will be available at restaurants.sba.gov and the applications are expected to open sometime this month. Please note that as of the release of this tax alert the link is not yet live. A draft application was submitted to the Office of Management and Budget (OMB) as part of the review package.

SBA Associate Administrator Patrick Kelley addressed some details with the Independent Restaurant Coalition on April 13, 2021. Kelley revealed some important details operators need to know about where and how to apply when applications go live.

Not everyone will get money, even if they’re eligible. Unfortunately, Kelley said, the voted-on funding is not enough to meet the demand of the industry, and many eligible applicants will not be able to receive funding due to shortages of cash and high demand. Due to this demand, Kelley is strongly recommending operators apply on the first day. If Congress sees high enough demand, he said, there could be another round of funding.

Of the $28.6 billion fund, $5 billion is allocated specifically to eligible entities with gross receipts of no more than $500,000 in 2019. Grants will be awarded in the order received; however, priority will be given to those businesses owned and controlled by women, veterans or certain socially or economically disadvantaged individuals.

Some key items to keep in mind:

  • Applicants CANNOT use the grant funds for wages for which the employee retention credit (ERC) will be claimed.
  • Similar to PPP loans, proceeds are not included in federal taxable income and expenses paid for with the funds are tax deductible if used for authorized purposes.
  • State taxability may vary depending upon whether each state conforms to this provision.
  • Grant recipients are able to spend proceeds on a wide range of expenses incurred from Feb. 15, 2020, to Dec. 31, 2021, including:
    – Payroll costs
    – Principal and interest payments on a mortgage, not including any prepayments on principal
    – Rent payments, not including prepayments
    – Utilities
    – Maintenance expenses including construction to accommodate outdoor seating and walls, floods, deck surfaces, furniture, fixtures and equipment
    – Supplies including personal protective equipment and cleaning materials
    – Food and beverage expenses within the eligible entity's scope of normal business practice before the covered period, which runs from Feb. 15, 2020, through Dec. 31, 2021, or another date as determined by the SBA
    – Covered supplier costs
    – Operational expenses
    – Paid sick leave
    – Any other expenses the SBA determines to be essential to maintaining the eligible entity
  • Grants generally are equal to the loss in revenue from 2019 to 2020, reduced by any PPP proceeds received in 2020 or 2021.

Example: Restaurant A had revenue in 2019 of $1.2 million. In 2020, revenue dropped to $500,000. Also in 2020, the restaurant borrowed and spent a $300,000 PPP loan. It is eligible for an RRF grant of $400,000 ($1.2 million minus $500,000 minus $300,000).

  • Businesses not in operation for all of 2019 take the difference between 12 times the average monthly gross receipts for 2019 less gross receipts in 2020. SBA may provide an alternative formula via forthcoming guidance.
  • Businesses not in operation until 2020 take eligible expenses incurred minus any gross receipts received. SBA may provide an alternative formula via forthcoming guidance.

 Example: Restaurant B opened in March 2020. It incurred $400,000 of eligible expenses to date but earned only $220,000 in revenue. B is eligible for an RRF grant of $180,000.

  • Businesses that did not open before mid-March 2020 can get a grant equal to eligible expenses incurred.
  • State or local government-operated businesses, businesses with more than 20 locations and publicly traded companies are ineligible.
  • Business cannot also receive Shuttered Venue Operators Grant.

Action steps:

Eligible restaurants should gather all evidence of their gross receipts and calculate the reduction of the gross revenue received in 2020, compared to 2019. Restaurants also should project their eligible expenses for the covered period – Feb. 15, 2020, through Dec. 31, 2021 – and allocate the costs among any other funds they have received through the PPP or ERC.

Given the funding restraints of the RRF, we recommend eligible entities utilize the draft application to collect relevant data now so information is readily available when the application formally opens.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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