4.27.21 | Client Alert
On April 17, 2021, the Small Business Association (“SBA”) released a sample application form and program guidance for the Restaurant Revitalization Fund (“RRF”). Created in March as part of the American Rescue Plan (“ARP”), the RRF will provide tax-free grants of up to $5,000,000 per eligible entity with a $10,000,000 cap for affiliated businesses1, calculated for most entities based on their revenue reduction between 2019 and 2020.
The SBA’s guidance mostly reinforces statutory provisions written by Congress in the ARP. However, there are a few notable aspects that clarify certain features of the RRF2.
As a refresher, 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. However, 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%, or in which an eligible entity has the contractual authority to control direction of the business.
33% Rule for Mixed Businesses
The RRF statutory definition of an eligible entity is so expansive that it includes many entities which may both sell food and beverages to the public and generate revenue otherwise. Previously, it was unclear what the threshold would be for certain businesses to be eligible for one of these grants. In order to provide a bright line test, the SBA has created a 33% rule that applies to the following entity types:
- Tasting rooms
- And the catch-all, other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink
The rule requires that on-site sales of food and beverage comprise at least 33% of an entity’s gross receipts in 2019 or for businesses that opened in 2020 or have yet to open, the original business model must have contemplated at least 33% of such receipts. This applicant-friendly rule will allow many entities to qualify for RRF grants even if less than half of their receipts are of the type that would normally be considered eligible under this program. In addition, the guidance does not further define the term “Inn” for RRF purposes, suggesting an expansive definition that likely includes hotels, if they meet the 33% gross receipts threshold.
Separate Entities Rule
The SBA’s guidance further specifies that an eligible entity is any of the specifically enumerated entity types that operates independently inside of another business. It provides the following example of an independent entity, which is one that has its own tax ID number, and specifically mentions that a restaurant that operates independently inside a hotel or conference center would be separately eligible. Based off the guidance, it does not appear that having a separate tax ID number is a prerequisite to be classified as an independent entity, rather it is merely an example. This should provide some much-needed relief to the hotel industry, as it was unclear whether the operation of a restaurant inside of a hotel would be eligible for a grant.
Use of Funds through 2023
The RRF provided the SBA with the ability to extend the covered period to use funds until March 11, 2023. The SBA has now exercised that option so that RRF recipients will have almost two more years to spend the grant money received under the program.
Expansion for Unopened Restaurants
The SBA has clarified that entities which have not yet opened for sales but as of March 11, 2021 have incurred eligible expenses are eligible RRF recipients, and are able to apply for a grant equal to the amount spent on eligible expenses from February 15, 2020 through March 11, 2021 less the amount of any first or second draw PPP loans.
- Completed Application Form 3172
- Verification for tax Information, IRS Form 4506-T
- Gross receipts documentation (any of the following documents can demonstrate gross receipts):
- Business tax returns (IRS Form 1120, Form 1120-S, Form 1065)
- IRS Form 1040 Schedule C; IRS Form 1040 Schedule F
- Bank statements
- Financial statements
- Point of sale reports, Including IRS Form 1099-K
- For applicants that are subject to the 33% gross receipts rule, documents evidencing that onsite sales to the public comprise at least 33% of gross receipts for 2019.
- Past 3 monthly bank statements
While the RRF is not yet open for applications, it is well-advised that potential applicants become familiar with these rules and begin to get their documentation ready and calculate their potential grant amounts. It is unclear how long funds will remain available once the application process opens to the public. It is also likely that this is not the last guidance issued by the SBA on this program with more rules, seemingly a formal Interim Final Rule (“IFR”) or FAQ, forthcoming. As always, as more information and guidance are released about the RRF, we will keep you informed. 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.