The COVID-19 pandemic impacted many businesses and employees over the past year, but arguably few industries were hurt as severely as the restaurant industry. Across the county, restaurants suffered many setbacks and explored new ideas, like curbside orders, to stay afloat.
While several restaurants took advantage of the “Paycheck Protection Program” (“PPP”) Draw 1 and/or Draw 2, Congress recently enacted additional relief for the industry. As part of the recent American Rescue Plan Act (enacted March 11, 2021), Congress released the “Restaurant Revitalization Grant” (“RRG”). There is limited guidance now on this new program, but what we do know is that restaurants may uncover opportunities in evaluating the RRG program. This article offers an overview of the RRG.
While PPP loans were a lifeline for many restaurants, the industry still languished for most of 2020 due to reductions in hours, seating capacity, employees, and customer interest. Many restaurants even eventually closed. It is with this backdrop that Congress decided another targeted relief effort was needed for restaurants.
It should be noted that the tax consequences of the RRG are similar to the PPP loan. Thus, the receipt of an RRG: (1) is not taxed on the receipt of the grant; (2) any expenses incurred with the grant are deductible; and (3) provides a basis adjustment for partners in a partnership or S Corporation shareholders for the tax-exempt income from the grant.
It’s important to understand Congress’ definition of a “restaurant” for purposes of the RRG. Eligible entities are essentially businesses (that are not permanently closed) where the customers gather for the primary purpose of being served food or drink. The new law employed an expansive definition as follows:
An eligible entity “means a restaurant, food stand, food truck, food cart, caterer, saloon, inn, tavern, bar, lounge, brewpub, tasting room, taproom, licensed facility or premise of a beverage alcohol producer where the public may taste, sample, or purchase products, or other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink.”
The SBA expanded this definition by providing the following could also be an eligible entity: snack and nonalcoholic beverage bars, bakeries, brewpubs, tasting rooms, taprooms, breweries and/or microbreweries, wineries and distilleries, and inns.
The SBA further specified the following related to eligible entities for the RRG:
The new law also specifies that certain entities are ineligible for the RRG, including:
The determination of the amount of the RRG is straightforward. Restaurants applying for a grant that were in operation prior to 2019 can determine the amount as follows (Method A):
Step 1: Gross Receipts reported on the entity’s 2019 tax return.
Step 2: Gross Receipts reported on the entity’s 2020 tax return. Do not include any amounts received from a PPP loan (First or Second Draw); SBA Section 1112 payments; any SBA EIDL loan; EIDL Advances; or any state and local small business grants (via CARES or otherwise).
Step 3: Subtract the total original disbursements of any PPP loans (First Draw and Second Draw) received, regardless of whether received in 2020 or 2021.
Step 4: Amount is capped at $5 million per location, and a total that includes affiliates is limited to $10 million. There is also a floor amount of $1,000. Thus, no grants of under $1,000 will be made.
There are different formats for restaurants that began operations in 2019 or after. Restaurants that began operations during 2019 can elect to use Method B or C. Method B is similar to Method A addressed above, except for a change in Step 1. Since 2019 would not be a full year, the entity would annualize the gross receipts it generated in 2019 for the period of its operations. This annualized amount then becomes its 2019 gross receipts, and Steps 2, 3, and 4 are followed as outlined in Method A.
Restaurants that began operations in 2020 and up through March 10, 2021 (also restaurants that have not yet opened, as of March 11, 2021) but have incurred eligible expenses (discussed later) use Method C as follows:
Step 1: Begin with the total spent on eligible expenses incurred on or between February 15, 2020 and March 11, 2021.
Steps 2, 3, and 4: These steps are similar to what is provided in Method A above. Thus, for Step 2, subtract any gross receipts the entity reported for the 2020 year.
A restaurant that began operations in 2019 can use either Method B or C – whichever produces the higher amount.
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The RRG offers an array of eligible expenses, as spelled out by the SBA:
The timeframe for incurring the above expenses is much more generous than with a PPP loan. With an RRG, the covered period to use these funds actually began back on February 15, 2020 and runs through March 11, 2023. An eligible entity has over three years to use the amount of its grant on eligible expenses. In some situations, an entity may have expended these amounts even prior to the entity receiving its grant!
With a PPP loan, the borrower worked through a local bank to apply for and receive its loan with oversite by the SBA. The RRG, however, is applied for directly with the SBA. The SBA offers three ways for an eligible entity to apply for the RRG:
Entities applying for a grant must submit the following documentation with its application:
Congress did establish a priority process for the RRG applications. The SBA first grants RRG funds to small businesses with ≥ 51% owned and controlled by individuals who are women, veterans, and/or socially and economically disadvantaged individuals. The applicants must self-certify on the application that they meet eligibility requirements of one or more of these groups.
The SBA will accept applications from all eligible businesses. During the first 21-day period, the SBA will distribute funds only for approved applications in the priority window. After this 21-day period is over, the SBA will accept RRG applications from and distribute funds to all eligible applicants.
Restaurants have endured many challenges since the pandemic struck. Restaurants are encouraged to explore the merits of the new RRG programs and see if they qualify. Please contact your Sikich advisor to assist you with any questions you have and to help you navigate the RRG application process.
We have included the following resources for your reference:
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