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.
Background
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.
The Basics: What is a Restaurant?
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:
- For bakeries, brewpubs, tasting rooms, taprooms, breweries, microbreweries, wineries, and distilleries to be eligible, the business must document with its application that on-site sales to the public consisted of ≥ 33% of its 2019 gross receipts. For businesses that opened in 2020 (or are not open yet), the business model should have contemplated ≥ 33% of gross receipts to be from on-site sales to the public.
- For inns to be eligible, the business must document with its application that on-site sales of food and beverage to the public consisted of ≥ 33% of its 2019 gross receipts. For inns that opened in 2020 (or are not open yet), the business model should have contemplated ≥ 33% of gross receipts to be from on-site food and beverage sales to the public.
- Eligible entities include any of the above entities located inside an airport terminal.
- It also covers entities that operate independently (e., they have their own federal ID #) inside another business (e.g., a restaurant operating independently within a hotel or conference center); or that are a Tribally-owned concern.
- For franchises, if a business operates under a franchise or similar agreement that meets the Federal Trade Commission (FTC) definition of a “franchise,” it is an eligible entity. The franchise must be listed on the SBA’s Franchise Directory with a franchise identifier code.
The new law also specifies that certain entities are ineligible for the RRG, including:
- Any state or local government-operated business.
- Any business that is permanently closed.
- A business that, as of March 13, 2020, owns or operates > 20 locations (regardless of type or name of these locations).
- All publicly traded companies as well as all not-for-profit organizations.
- Any business that received or has a pending application for a “Shuttered Venues Operators Grant” (“SVOG”).
How Much Funding Can a Restaurant Receive?
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.
RRG Eligible Expenses
The RRG offers an array of eligible expenses, as spelled out by the SBA:
- Business payroll costs, including sick leave and costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums.
- Payments on any business mortgage obligation (both principal and interest; note: does not include any prepayment of principal on a mortgage obligation).
- Business rent payments, including rent under a lease agreement (note: does not include any prepayment of rent).
- Business debt service (both principal and interest; note: does not include any prepayment of principal or interest).
- Business utility payments for the distribution of electricity, gas, water, telephone, or internet access, or any other utility that is used in the ordinary course of business for which service began before March 11, 2021.
- Business maintenance expenses including maintenance on walls, floors, deck surfaces, furniture, fixtures, and equipment.
- Construction of outdoor seating.
- Business supplies, including protective equipment and cleaning materials.
- Business food and beverage expenses, including raw materials for beer, wine, or spirits.
- Covered supplier costs, which is an expenditure made by the eligible entity to a supplier for the supply of goods that:
- Are essential to the operations of the entity at the time at which the expenditure is made; and
- Is made pursuant to a contract, order, or purchase order in effect at any time before the receipt of RRG funds; or
- With respect to perishable goods, a contract, order, or purchase order in effect before or at any time during the covered period.
- Are essential to the operations of the entity at the time at which the expenditure is made; and
- Business operating expenses, which are defined as business expenses incurred through normal business operations that are necessary and mandatory for the business (e.g. rent, equipment, supplies, inventory, accounting, training, legal, marketing, insurance, licenses, fees). Business operating expenses do not include expenses that occur outside of a company’s day-to-day activities.
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!
RRG Application
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:
- With a recognized SBA Restaurant Partner. Per the SBA, it developed partnerships with technology companies that provide services to the restaurant industry to ensure equitable distribution of relief. If a restaurant currently uses one of the SBA’s Restaurant Partners, it can apply for RRG funding through the SBA’s website (or a secure portal). This can ease the application process for businesses.
- Directly with the SBA through its website at: restaurants.sba.gov.
- Over the phone by calling (844) 279-8988. In this situation, the entity completes the application questionnaire and statements with the SBA agent. The completed application is mailed by the SBA to the applicant, who must sign the application, have it notarized, and returned to the SBA. The SBA will then review the application.
- Registration for the SBA application portal will begin on Friday, April 30, 2021, at 9 AM EST. RRG applications will open on Monday, May 3, 2021, at 12:00 PM EST through the SBA.
Entities applying for a grant must submit the following documentation with its application:
- SBA Form 3172 (SBA’s RRG application).
- IRS Form 4506-T (verification for tax information).
- Gross Receipts Documentation. Any document that verifies gross receipts and, if applicable, eligible expenses.
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 also invite you to join us for our Sikich Webinar on the RRG on Wednesday, May 5, 2021 at 10:00 AM CST.
We have included the following resources for your reference:
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
Tim Beine
Tim Beine, CPA, has experience serving clients in a variety of industries ranging from professional services to healthcare and manufacturing. He provides clients with expert tax planning services, outsourced accounting functions, controller CFO functions, payroll services, and more. Primarily serving owner-managed businesses, Tim works with companies of all sizes.
