3.19.21 | Client Alert
The latest round of government stimulus, the American Rescue Plan (“ARP”) Act, signed into law earlier this month, includes a new relief program for restaurants and other food and beverage providers. The Restaurant Revitalization Grant (“RRG”) program provides tax-free grants of up to $5,000,000 per each eligibly entity and up to $10,000,000 for affiliated restaurants.
The RRG, like the Paycheck Protection Program (“PPP”), is to be administered by the Small Business Administration (“SBA”). Eligible entities include 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 places of business in which the patrons assemble for the primary purpose of being served food or drink.
The maximum grant amount is equal to a company’s Pandemic-Related Revenue Loss subject to the caps above. However, entities that have received a Shuttered Venue Grant are not eligible. Pandemic-Related Revenue Loss is defined as 2020 gross receipts of an eligible entity subtracted from that same company’s 2019 gross receipts1 reduced by the amount of PPP loans taken (1st or 2nd draw). Entities are ineligible for the grant if they own or operate more than 20 establishments (together with affiliated businesses and regardless of whether the establishments do business under the same or multiple names), or if they are publicly traded. Affiliated businesses for this purpose are defined as a business in which an eligible entity has equity or a right to profit distributions of at least 50 percent, or in which an eligible entity has the contractual authority to control direction of the business.
As compared to the PPP, funds from these grants may be used more broadly on most operating expenses of an eligible entity.
Specifically, the statute lists the following as eligible expenses:
- Payroll Costs (as defined by PPP and reduced for any wages claimed in the Employee Retention Credit)
- Mortgage payments (interest or principal, but no prepayment)
- Supplies (including PPE and cleaning materials)
- Food and beverage expenses within the scope of normal business
- Covered Supplier Costs (as defined by PPP)
- Operational expenses
- Paid sick leave
- Any other expenses the SBA determines to be essential to maintaining the eligible entity
Funds must be used during the Covered Period, which is defined as February 15, 2020 through December 31, 2021. However, the SBA has authority to extend the Covered Period to as late as March 2023. Additionally, the SBA will need to provide guidance on whether, and how, recipients can account for costs paid or incurred prior to receiving the grant, but after February 15, 2020. Like PPP, recipients must make a good faith certification that the uncertainty of current economic conditions makes the grant request to support ongoing operations necessary. Any funds not used for qualified expenses at the end of the covered period are to be returned to the Treasury.
- If PPP history is any guide, the SBA will by its rulemaking have a lot to say about this program, clarifying its provisions, hopefully in a grantee-friendly way, and providing a roadmap of the process from application to confirming qualifying uses of funds.
- As noted above, the RRG statute defines affiliates for this purpose in a narrow fashion relative to SBA rules generally. Whether this will be expanded in the regulatory process remains to be seen.
- RRG grants are expressly exempt from federal income tax and amounts expended from or attributed to grant funds remain deductible. Partnerships and S corporations are directed to treat RRG grants as tax exempt income, thereby increasing a partner or shareholders basis in their partnership interest or stock.
The SBA has not yet opened the application window for Restaurant Revitalization Grants, and we expect that substantial guidance on this new program will be released in the near future. However, there will be an initial 21-day period in which the SBA will prioritize applications from small businesses owned by women or veterans, or other socially and economically disadvantaged small business concerns. As always, as more information and guidance is released about the RRG, we will keep you informed of the potential tax impact. If you have any questions, please contact your Berdon advisor.
This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.
1Adjusted calculations are provided for restaurants not in operation for all of 2019 as well as restaurants opened between January 1, 2020 and the enactment of this law.