“Under the American Rescue Plan Act of 2021, $28.6 billion worth of tax-free grants will become available to restaurants, bars, and associated food and beverage related businesses. These funds are meant to augment reduced revenues as a result of the coronavirus pandemic. As there are approximately one million restaurants and bars in the United States, the American Rescue Plan Act allots roughly $28,600 per eligible entity. The funds awarded may be used on a wide variety of permissible expenditures necessary for continuing operation. The details of the new fund are discussed below along with excerpts from the statutes.”
Alan Gassman and Brandon Ketron provide members with commentary that reviews how the Restaurant Revitalization Fund operates.
Alan S. Gassman, J.D., LL.M., is a partner in the law firm of Gassman, Crotty & Denicolo, P.A., and practices in Clearwater, Florida. He is a frequent contributor to LISI, and has published numerous articles and books in publications such as BNA Tax & Accounting, Estate Planning, Trusts and Estates, and Interactive Legal and is co-author of Gassman and Markham on Florida and Federal Creditor Protection and several other books. His email is [email protected].
Brandon Ketron, CPA, JD, LL.M. is an associate at the law firm of Gassman, Crotty & Denicolo, P.A., in Clearwater, Florida and practices in the areas of Estate Planning, Tax and Corpoate and Business Law. Brandon is a frequent contributor to LISI and presents webinars on various topics for both clients and practitioners. Brandon attended Stetson University College of Law where he graduated cum laude, and received his LL. M. in Taxation from the University of Florida. He received his undergraduate degree at Roanoke College where he graduated cum laude with a degree in Business Administration and a concentration in both Accounting and Finance. Brandon is also a licensed CPA in the states of Florida and Virginia. His email address is [email protected].
Here is their commentary:
EXECUTIVE SUMMARY:
Under the American Rescue Plan Act of 2021, $28.6 billion worth of tax-free grants will become available to restaurants, bars, and associated food and beverage related businesses. These funds are meant to augment reduced revenues as a result of the coronavirus pandemic. As there are approximately one million restaurants and bars in the United States, the American Rescue Plan Act allots roughly $28,600 per eligible entity. The funds awarded may be used on a wide variety of permissible expenditures necessary for continuing operation. The details of the new fund are discussed below along with excerpts from the statutes.
FACTS:
The latest COVID-19 stimulus package was welcomed in by restaurant owners on March 11th, 2021. With many COVID-19 relief measures expiring on March 14th, President Biden signed into law the American Rescue Plan Act of 2021 (the “Rescue Act”).
A prerequisite to receiving the grant is to verify under penalty of perjury that the funds are reasonably necessary to support the ongoing operation of the business. Profitable restaurants will be unable to prove this requirement and risk criminal prosecution. As all funds awarded are a matter of public record, it is possible that competing organizations report any fraudulent or unjustified awards. While some readers may remember how the PPP program had a safe harbor for loans under $2 million under certain conditions, no such harbor exists under the necessity requirement.
COMMENT:
What Businesses Qualify to Receive Restaurant Revitalization Funds?
An extensive list of food and beverage related businesses are considered “eligible entities” for the purposes of the RRF under the Rescue Act. A non-exhaustive list of these entities include:
- Restaurants;
- Food stands;
- Food trucks;
- Saloons;
- Inns;
- Taverns;
- Bars;
- Brew pubs; or
- Similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink.
The Rescue Act’s language dealing with “eligible entities” reads as follows:
(4) ELIGIBLE ENTITY.—The term “eligible entity”—
(A) 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;
(B) includes an entity described in subparagraph (A) that is located in an airport terminal or that is a Tribally-owned concern
The Rescue Act does have a list of businesses that do not qualify as eligible entities. These exceptions include:
- “State or local government-operated businesses”;
- Businesses that “own or operate (together with any affiliated business)” more than 20 locations, regardless of whether those locations do business under the same or multiple names;
- Businesses with a pending application for or have received a grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (title III of division N of Public Law 116-260); or 4) publicly-traded companies, by reason of the following language under the Act: or
- Publicly-traded companies (franchisees of publicly-traded companies may still qualify).
For the purpose of the Restaurant Revitalization Fund, 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 percent, or in which an eligible entity has the contractual authority to control the direction of the business, provided that such affiliation shall be determined as of any arrangements or agreements in existence as of March 13, 2020.”
A publicly traded company is one that is majority owned or controlled by an entity that issues ownership shares and whose securities are listed on a national securities exchange.
Section 124.3 of Title 13 defines a tribally owned business as “any concern at least 51 percent owned by an Indian tribe”.
On top of the previous requirements, eligible entities must show that they suffered a loss as a result of the pandemic. Thankfully, any decrease in gross receipts in 2020 compared to 2019 can be attributed to the pandemic. Note that both PPP I and PPP II loan proceeds are considered to be revenues for purposes of this calculation.
Therefore, under this new law, assuming your business’ pricing hasn’t changed, sold one less entrée in 2020 compared to 2019, and did not receive a PPP loan, your restaurant has suffered a pandemic-related loss. While it is simple to prove that losses are attributable to the pandemic, the law does require a good-faith showing that the receipt of funds under this section is necessary to continue business operations in the current uncertain economic times.
As mentioned above, there is currently no safe harbor for this necessity requirement like there is for the Paycheck Protection Program. Under the Paycheck Protection Program, First Draw borrowers with loans of less than $2,000,000, and all Second Draw loan borrowers (by virtue of meeting the revenue reduction test) were deemed to have met the requirement related to the necessity in good faith; however, the same does not apply for purposes of the Restaurant Revitalization Fund.
The statute does delegate significant authority to the SBA, so it is possible that a safe harbor may be given, but only time will tell. It is important to note that restaurants will already being receiving larger Paycheck Protection Loans than other businesses (3.5x average monthly payroll instead of 2.5x times, and will also be receiving significant refundable tax credits under the Employee Retention Credit program. An example under recently issued IRS Notice 2021-20 illustrates that state or local government restrictions on indoor dining constitutes a partial suspension of the business; therefore, a vast majority of restaurants will qualify for the receipt of Employee Retention Credits in 2020 and the first quarter of 2021.
The receipt of funds from other programs will have to be considered in determining whether the grant is “necessary”. For more on the necessity requirement see LISI Business Entities Newsletter #186 (April 27, 2020).
Any entity that has previously applied for or received a Shuttered Venue Grant will not be eligible for an RRF grant.
The bill provides the following guidance to determine if businesses that were not in operation for all of 2019 or just opened in 2020 have suffered a pandemic related loss:
(B) if the eligible entity was not in operation for the entirety of 2019—
(i) the difference between—
(I) the product obtained by multiplying the average monthly gross receipts of the eligible entity in 2019 by 12; and
(II) the product obtained by multiplying the average monthly gross receipts of the eligible entity in 2020 by 12; or
(ii) an amount based on a formula determined by the Administrator;
How Much Will My “Eligible Entity” Receive?
The general provision is that an eligible entity is able to receive an amount equal to the suffered pandemic loss, but not exceeding up to $10 million for each eligible entity or $5 million per physical business location.
Loss in revenue in 2020 is calculated by first subtracting 2020 gross receipts from 2019 gross receipts. As noted above, this amount of losses must be reduced by the amount of loans received from either the First Draw or Second Draw of PPP loans in 2020 or 2021. Unlike for PPP Second Draw revenue reduction calculations, Economic Injury Disaster Loan Advances or funds received through the Employee Retention Credit program will count as revenues for purposes of calculating pandemic related losses.
What Are “Eligible Expenses” for Restaurant Revitalization Fund Purposes?
Restaurants that receive Restaurant Revitalization Funds can use them for a wide variety of “eligible expenses” are that are either incurred as a direct result of, or during, the COVID-19 pandemic in order to maintain business operations. Any of the following expenses set forth in the Rescue Act are “eligible expenses”:
- (A) Payroll costs.
- (B) Payments of principal or interest on any mortgage obligation (which shall not include any prepayment of principal on a mortgage obligation).
- (C) Rent payments, including rent under a lease agreement (which shall not include any prepayment of rent).
- (D) Utilities.
- (E) Maintenance expenses, including—
- (i) construction to accommodate outdoor seating; and
- (ii) walls, floors, deck surfaces, furniture, fixtures, and equipment.
- (F) Supplies, including protective equipment and cleaning materials.
- (G) Food and beverage expenses that are within the scope of the normal business practice of the eligible entity before the covered period.
- (H) Covered supplier costs, as defined in section 7A(a) of the Small Business Act (as redesignated, transferred, and amended by section 304(b) of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Public Law 116–260)).
- (I) Operational expenses.
- (J) Paid sick leave.
- (K) Any other expenses that the Administrator determines to be essential to maintaining the eligible entity.
How Long Are My Funds Available?
The Rescue Act currently states that the “covered period” expires on the 31st of December 2021 and all unused funds must be returned on that date. However, the Rescue Act has also given the SBA the authority to extend the covered period by as much as two years after the Act is signed into law.
As Congress and other non-clairvoyants are unable to determine when the pandemic will end precisely, it is advised to spend Restaurant Revitalization Funds earlier rather than later, in case the crisis is over by summer.
How Will the Funds be Distributed?
The Small Business Administration will begin by prioritizing eligible entities owned by women, veterans, and businesses that are socially and economically disadvantaged. The specific language establishing this initial period is provided below:
- A) IN GENERAL.—During the initial 21-day period in which the Administrator awards grants under this subsection, the Administrator shall prioritize awarding grants to eligible entities that are small business concerns owned and controlled by women (as defined in section 3(n) of the Small Business Act (15 U.S.C. 632(n))), small business concerns owned and controlled by veterans (as defined in section 3(q) of such Act (15 U.S.C. 632(q))), or socially and economically disadvantaged small business concerns (as defined in section 8(a)(4)(A) of the Small Business Act (15 U.S.C. 637(a)(4)(A))). The Administrator may take such steps as necessary to ensure that eligible entities described in this subparagraph have access to grant funding under this section after the end of such 21-day period.
The Rescue Act further provides that $5,000,000,000 shall be available to eligible entities with less than $500,000 of gross receipts during 2019, and that the remaining $23,600,000,000 “shall be available to the Administrator to award grants under subsection (c) in an equitable manner to eligible entities of different sizes based on annual gross receipts.” Once 60 days has passed, the program will then open up to all eligible entities regardless of revenue and the Rescue Act states that Grants will be awarded “in the order in which applications are received by the Administrator.
Presumably this means that there will be tiered applications windows based on the above noted criteria. Those eligible should apply as soon as the application window opens in order to get their spot in line.
What Should I Do Now?
While it is not currently known when applications for grants will start being accepted, Rep. Earl Blumenauer (D – Or.) said in a press conference on March 10th that he expects the grant applications to open “within weeks, not months.” For individuals and businesses who have not yet applied for federal grants, it is important to register to receive a DUNS number, which is a nine-digit ID number that is necessary for registering on Grants.gov.
Individuals who qualify for PPP loans and the RRF grant should still apply for both even though the RRF grant total is reduced by the amount of PPP loans received as PPP loans will be forgiven if the funds are used appropriately and in a timely manner. The PPP is a much larger program than the RRF, which will likely run out of funding relatively quickly, and is available to a wider array of struggling entities.
HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
Alan Gassman
Brandon Ketron
CITE AS:
LISI Business Entities Newsletter #225 (March 22, 2021) at http://www.leimbergservices.com Copyright 2021 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited, Without Express Permission. This newsletter is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.
