As part of the recently enacted American Rescue Plan Act, signed into law on March 11, 2021, Congress created a new grant program to be administered by the Small Business Administration. The $28.6 billion program, commonly referred to as the Restaurant Revitalization Grant Program, aims to provide funding to businesses in the food and beverage service industry that have experienced pandemic-related revenue losses. This FGMK Alert provides an overview of the key elements of the program and recommendations for entities interested in applying as the program will soon open.
With respect to eligible entities that must meet the 33 percent gross receipt threshold, the Act identifies an eligible entity as a “place of business in which the public or patrons assemble for the primary purpose of being served food or drink.” In program guidance released on April 17th, the SBA set forth the respective 33 percent gross receipt thresholds for eligible entities to qualify under this statutory language. Such eligible entities will have to provide documentation that shows that the respective 33 percent gross receipt threshold was met in 2019. For those businesses subject to the requirement and that opened in 2020 or have not yet opened, their original business model must have contemplated at least 33 percent of gross receipts in on-site sales to the public.
The Act provides that any of the above entities located in an airport terminal or that is a Tribally owned concern would qualify as an eligible entity. And the recently released SBA guidance clarifies that an entity that operates independently (i.e., has its own tax identification number) inside another business (e.g., a restaurant operating independently inside a hotel) may qualify.
Eligible entities include C corporations, S corporations, partnerships, limited liability companies, sole proprietors, self-employed individuals, independent contractors, and Tribal businesses. SBA guidance also clarifies that an applicant is eligible if it is operating under a franchise or similar agreement that meets the Federal Trade Commission definition of a franchise. The guidance asserts that the franchise must be listed on the SBA Franchise Director with a franchise identifier code to ensure eligibility. If not listed, a franchisor must submit the Franchise Disclosure Document (or other agreement) and other required documentation that a franchise is required to sign to the SBA to establish that it meets eligibility criteria.
The Act and SBA guidance exclude the following entities from the grant program:
The Act defines an “affiliated business” as a business in which an eligible entity has an equity or right to profit distributions of not less than 50 percent, or in which an eligible entity has the contractual authority to control the direction of the business as of March 13, 2020.
An eligible entity, including any affiliated business, may obtain a maximum grant of $10 million. The Act also limits a grant to $5 million per physical location of an eligible entity. The SBA guidance provides that the minimum funding level is $1,000, and thus applications requesting funding under that level will not be accepted or approved.
An eligible entity will apply to the SBA for funding consideration. The SBA will base the grant amount on the applicant’s pandemic-related revenue loss. For businesses in operation prior to 2019, the Act defines “pandemic-related revenue loss” as the difference between 2019 gross receipts and 2020 gross receipts. The Act sets forth an annualized average monthly gross receipt calculation for businesses that began operation in 2019. For businesses that began operation after January 1, 2020 and before March 11, 2021, the Act utilizes a formula that subtracts gross receipts received from payroll costs incurred by the eligible entity on or between February 15, 2020 and March 11, 2021. Similarly, businesses that have not yet opened for sales as of March 11, 2021 may apply for a grant based on payroll costs incurred in preparation for opening as of March 10, 2021. For purposes of the calculations, gross receipts do not include amounts received from PPP, SBA Section 1112 payments, SBAL Economic Injury Disaster Loans (“EIDL”), EIDL Advances, Targeted EIDL Advances, Randolph-Sheppard Act Financial Relief and Restoration Payments Appropriation state and local small business grants (via the CARES Act and otherwise).
The term “payroll costs” is defined by reference to the term used for the SBA’s PPP, i.e., the sum of gross employee wages capped at $100,000, employer-covered benefits, employer-paid retirement benefits, and state unemployment taxes. While a recipient of a First Draw or Second Draw PPP loan remains eligible, the grant amount will be reduced by the sum of any PPP loan previously received, whether in 2020 or 2021.
Grant recipients may use the funds for the same types of costs as allowed by the PPP (payroll costs, mortgage interest obligations, rent obligations, utilities, etc.). Additionally, recipients may use the grant for maintenance expenses, including construction to accommodate outdoor seating, walls, floors, deck surfaces, furniture, fixtures, and equipment, supplies, such as personal protective equipment and cleaning materials, and food and beverage expenses that are within the normal scope of business practice by the entity.
Eligible expenses also include covered supplier costs, operational expenses, and paid sick leave. SBA guidance defines “covered supplier costs” as expenditures made to a supplier of goods that are essential to operations at the time the expenditures are made pursuant to a contract, order, or purchase order in effect before receipt of funds (if for perishable goods, such contract, agreement, etc., may be made between February 15, 2020 and March 11, 2023). The guidance defines “operational expenses’ as business expenses incurred through normal business operations that are necessary and mandatory for the business (e.g., inventory, accounting, marketing, insurance, licenses, fees, etc.).
Grant recipients will have to report through the SBA’s application portal by December 31, 2021, how much of the grant award has been used against each eligible use category and certify that such proceeds were used for eligible purposes. If a grant recipient does not spend all funds by December 31, 2021, it will have to complete annual reporting submissions until the award is fully utilized.
If the grant recipient does not spend all funds by March 11, 2023 or before it ceases operations, it must return the funds to the United States Treasury Department.
For tax purposes, the grant funds are not included in gross income. Further, like the PPP, a grant recipient may deduct the expenses for which the funds are used, if such expenses are otherwise eligible for deduction. And the exclusion from gross income for tax purposes will not negate an increase in tax basis or reduce any tax attribute. A partner in a partnership or shareholder in an S corporation will treat the grant as tax-exempt income.
Preparing to Apply
The SBA has not yet opened the application period. However, it has asserted that interested applicants will have three modes for application, including through a recognized SBA Restaurant Partner (check the SBA website for updated listings of providers), the SBA’s website at restaurants.sba.gov, and telephonically at 844-279-8898.
Importantly, the SBA will provide funds on a first-come-first-served basis. However, the Act also provides for an initial 21-day period priority application period during which the SBA will only accept applications from small businesses at least 51 percent owned and controlled by individuals who are women, veterans, and/or socially and economically disadvantaged individuals. After the initial 21-day application period, the SBA will accept applications from all eligible applicants and distribute funds until funds are expired.
The SBA has set-aside funds available for only certain applicants.
A restaurant with multiple locations under the same Employer Identification Number (“EIN”) must apply for all locations on one application. However, interested applicants that operate businesses under separate EINs must file an application for each entity with a separate EIN.
The SBA has provided a sample application Form 3172. FGMK encourages interested entities to review the sample application and begin preparing application materials, including documentation supporting gross receipts and calculations.
Supporting documentation may include 2019 and 2020 business income tax returns (sole proprietorships and self-employed applicants should use Schedule C of Form 1040), bank statements, point of sale reports, and externally or internally prepared financial statements such as income statements or profits and loss statements. As a reminder, entities needing to support that 33 percent of sales occur on-site will also have to submit documentation that supports this threshold.
FGMK professionals can assist clients interested in the program, including preparing calculations that support requested grant amounts. We will continue to monitor the grant program, future guidance, and SBA updates to keep our clients informed.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.