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Restaurant Revitalization Grant Program Provides Grants to a Wide Range of Eligible Entities

April 28, 2021
Hinshaw Alert

President Biden signed into law the American Rescue Plan Act of 2021 (ARP Act) on March 11, 2021. The $1.9 trillion economic recovery package revised the Paycheck Protection Program (PPP) and the Shuttered Venue Operator Grant Program (SVOG), and also created the Restaurant Revitalization Grant Program (RRG Program).

This client alert reviews the RRG Program, as well as the Restaurant Revitalization Funding Program Guide (Program Guide) issued by the Small Business Administration (SBA) on April 17, 2021. It also examines the SBA Restaurant Revitalization Fund Knowledge Base (RRFK Base) set forth on the SBA's website.

Restaurant Revitalization Grants

The RRG Program is authorized to issue up to $28.6 billion in grants to eligible entities (RRG Program Funds).

To ensure that the smallest businesses and those in underserved communities receive funding awards, the SBA has set aside funds available only for certain applicants.

  1. $5 billion is set aside for applicants with 2019 gross receipts of not more than $500,000.
  2. An additional $4 billion is set aside for applicants with 2019 gross receipts from $500,001 to $1.5 million.
  3. An additional $500 million is set aside for applicants with 2019 gross receipts of not more than $50,000.

During the initial 21-day RRG Program awards period, the SBA is instructed to prioritize eligible entities (Priority Group) that are small business concerns owned and controlled by women, veterans, or socially and economically disadvantaged individuals (see Priority in Awarding Funding).

The SBA is advising all applicants to file their RRG Program applications as soon as the SBA starts accepting them. A sample of the application is available on the SBA's website.

Suppose an applicant applies during the priority period and it is not an eligible member of the Priority Group. In that case, the SBA will hold the application and process it after the priority period is over.

Eligibility

Eligible entities are businesses that have not permanently closed and include businesses where the public or patrons assemble for the primary purpose of being served food or drink, including:

To satisfy the catch-all requirement to qualify as a "place of business in which the public or patrons assemble for the primary purpose of being served food or drink," at least 33% of an entity's 2019 sales must have consisted of on-site sales to the public.

For eligible entities that opened in 2020 or that have not yet opened, the original business model of such an entity should have contemplated that at least 33% of its gross receipts would consist of on-site sales to the public.

Entities without additional documentation requirements, such as restaurants and bars, are presumed to have made on-site sales to the public comprising at least 33% of gross receipts in 2019.

Bakeries, brewpubs, tasting rooms, taprooms, breweries, microbreweries, wineries, and distilleries must provide documentation with their applications demonstrating that on-site sales to the public comprised at least 33% of their gross receipts in 2019.

For such an entity that opened in 2020 or that has not yet opened, the applicant's original business model should have contemplated at least 33% of gross receipts would consist of on-site sales to the public.

Inns must include documentation with their applications demonstrating that on-site sales of food and beverage to the public comprised at least 33% of gross receipts in 2019. For businesses that opened in 2020 or that have not yet opened, the applicant's original business model should have contemplated that at least 33% of gross receipts would consist of on-site food and beverage sales to the public.

If any of the above listed entities are located in an airport terminal or operate independently (i.e. has its own tax identification number (TIN)) inside another business (e.g. a restaurant that operates independently inside a hotel or conference center) or that is a Tribally-owned concern, it is eligible to participate in the RRG Program.

Motels and Hotels

Motels and hotels do not qualify as inns under the SBA's rules.

The following are ineligible entities:

Cannabis-Related Businesses

Businesses that offer cannabis products are not eligible. Per the RRFK Base, all business operations, products, and sales must be legal under all federal, state, and local laws. Tetrahydrocannabinol (THC) is an illegal substance under federal laws.

Locations

Each place where an applicant or affiliates conduct sales from a permanent structure is counted as a location. If the applicant or affiliates conduct sales from multiple permanent locations, each address is a separate location. For a caterer or a single business with multiple food stands, trucks, or carts, the physical location is where the business is headquartered—i.e., a business with one permanent structure and five food trucks will have one location, and a caterer will have one location.

RRG Amounts

Grants available to most eligible entities are expected to be equal to the difference between 2019 and 2020 gross receipts for each location.

There are special rules to calculate the amount that an applicant may receive if it was not in business for all of 2019 or opened after January 1, 2020, and before March 11, 2021, the effective date of the ARP Act.

Sample calculations for entities that did not operate in 2019 and entities in operation in 2019 are included in the Program Guide.

Maximum grant amounts are capped at $10 million for an affiliated group and $5 million per physical location. The minimum funding amount will be $1,000.

An affiliated business is defined as a business in which an eligible entity has an equity or right to profit distributions of not less than 50% or has contractual authority to control the direction of the business. This affiliation must have existed as of March 13, 2020.

RRG Program awards will be reduced by the amount of any First or Second Draw PPP loan received by an applicant.

Gross Receipts

Gross receipts generally consist of all revenue in whatever form received or accrued (in accordance with the entity's accounting method, i.e., accrual or cash) from whatever source. This includes sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances but excluding net capital gains and losses. These terms use the definitions reported on IRS tax return forms. Tips are not gross receipts.

The amounts required to calculate gross receipts varies by the entity tax return type:

The Program Guide identifies several sources of gross revenue that must be subtracted from gross receipts when determining the amount of the award.

Priority in Awarding Funds

Priority will be given to small businesses where at least 51% of the entity is owned and controlled by individuals who are women, veterans, or socially and economically disadvantaged individuals. Applicants in one of these categories operating under an approved plan of reorganization under either a Chapter 11, 12, or 13 bankruptcy and do not have a trustee exercising day-to-day control are eligible for funding under this program.

Applicants must certify that they meet eligibility requirements for a small business concern owned by women, small business concern owned by veterans, or small business concern owned by socially and economically disadvantaged individuals. The Program Guide provides further descriptions of these categories.

An applicant that is a small business—and at least 51% owned by one or more individuals who are women, veterans, or socially and economically disadvantaged—will be eligible for an award, provided the management and daily business operations of the applicant are controlled by one or more women, veterans, or socially and economically disadvantaged individual. The Program Guide and the RRFK Base provide the following examples:

RRG Uses

Eligible entities will be required to spend the award on certain eligible expenses as indicated below. Eligible expenses are those incurred from February 15, 2020, to March 23, 2023. If the business permanently closes, the covered period will end when the business permanently closes or on March 11, 2023, whichever occurs sooner.

Suppose a business obligation with a related party is documented—for example, on the applicant's balance sheet as a note payable with interest payments requested on the applicant's profit and loss statements or tax returns. In that case, payments can be made in accordance with the agreed upon terms.

Entities that do not use all of their RRG Program monies or use them for unallowable expenses must return the funds to the U.S. Department of Treasury (Treasury).

Use of Funds Validation

All applicants have until March 11, 2023, to use the awarded funds. Applicants are required to report through the application portal how much of their award has been used against each eligible use category by December 31, 2021. If the applicant fully expends their funds prior to this date, it will be asked to certify in the application portal that proceeds have been used on eligible expenses.

All applicants that do not fully expend award funds prior to this date will be required to complete annual reporting submissions until they fully expend the award funding or the period of performance expires. The SBA reserves the right to request supplemental documentation needed to validate the certification.

RRG Program Self Certification

As set out in the RRG Program sample application (SBA Form 3172) posted on the SBA's website, an applicant must submit a good faith certification that:

RRG Program Taxes

The ARP Act states that RRG Program Funds will not be included in the gross income of the entity that received funding. Further, no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied, because of the exclusion from gross income.

In the case of a partnership or S-Corporation—except as otherwise provided by the Secretary of the Treasury (or the Secretary's delegate)—any amount excluded from income by reason of the above will be treated as tax-exempt income for purposes of Sections 705 and 1366 of the Internal Revenue Code, and the Secretary of the Treasury (or the Secretary's delegate) shall prescribe rules for determining a partner's distributive share of any amount described above for purposes of Section 705 of the Internal Revenue Code.

Applicants should be aware that state and local governments may have their own laws regarding taxation at the local level.

Application Process

The Program Guide sets out procedures for an applicant to follow to file directly with the SBA.

As discussed in the Program Guide, the SBA has developed partnerships with multiple recognized technology companies that provide software, hardware, and payments services to the restaurant industry to help ensure wide and equitable distribution of relief. These partners are referred to as the SBA's Restaurant Partners or the SBA's Point-of-Sale Restaurant Partners.

If an applicant currently uses one of the SBA's Restaurant Partners, it can apply for funding through its website or secure portal.

The SBA is working to add additional partnerships.

Receiving Funds

The SBA will directly disburse proceeds to an applicant's operating account.

The SBA requires that funds be placed into the applicant's commercial business account. In cases of sole proprietors operating without a commercial account, the SBA will require supporting documentation to demonstrate that the account is used for restaurant operations and that the sole proprietor owns it.

The SBA will not allow fund accounts with limited (less than three months') history or unrelated ownership to the applicant.

Application Information

Applicant

The applicant must be the entity applying for RRG Program Funds.

A restaurant with multiple locations under the same Employer Identification Number (EIN) must apply for all locations in one single application.

Applicants may not apply on behalf of other entities, such as affiliates or subsidiaries.

Owners and TINs

The applicant must provide the TINs for the applicant business and all equity owners of 20% or more of the business. TINs may be EINs, Social Security Numbers (SSNs), or Individual TINs assigned by the IRS.

The total equity reported across the owners of 20% or more of the equity does not have to total 100% of all outstanding equity, as long as all 20% or more owners are listed in the application.

If no owner has at least 20% ownership of the applicant, the applicant must list enough owners whose combined equity represents at least 20% of the ownership of the applicant.

The parties listed below are considered owners of an applicant:


If the applicant is a sole proprietor without employees, the applicant must apply using the owner's SSN or Individual TIN assigned to the individual by the IRS or an entity EIN assigned to the entity by the IRS.

All other applicants, including sole proprietors with employees, must use the entity's EIN assigned to the entity by the IRS.

If a sole proprietor without employees does not have an SSN, ITIN, or EIN, or if any other entity does not have an EIN, the applicant is not eligible.

If an owner of 20% or more of the business does not have an SSN or ITIN, the business is not eligible.

Documentation Required

Applicants that were in operation before or on January 1, 2019, must supply at the time of application documentation of gross receipts for 2019 and 2020.

Applicants that began operations partially through 2019 and use Calculation 2 in the Program Guide must supply at the time of application documentation of gross receipts for 2019 and 2020. Applicants that began operations partially through 2019 and use Calculation 3 in the Program Guide must supply documentation of 2020 gross receipts at the time of the application.

Applicants that began operations on or between January 1, 2020, and ending on March 10, 2021, and applicants that have not yet opened as of March 11, 2021, but have incurred eligible expenses, must supply at the time of application documentation of gross receipts and eligible expenses for the length of time in operation.

Applicants must file the following documents (as applicable):


For Applicants that are a Brewpub, Tasting Room, Taproom, Brewery, Winery, Distillery, or Bakery

In addition to the documents listed above, documents evidencing that on-site sales to the public comprise at least 33% of gross receipts for 2019. These may include 2019 Tax and Trade Bureau Forms filed, state or local government forms filed, or internally created reports from inventory management, sales reporting, or accounting software.

For Applicants that are an Inn

In addition to the documents listed above, documents evidencing that on-site sales of food and beverage to the public comprise at least 33% of gross receipts for 2019. These may include internally created revenue reports or accounting reports.