The Restaurant Revitalization Fund continues to stir up questions, even as it nears its much-anticipated rollout. The American Rescue Plan Act of 2021 was signed into law on March 11, and included the $28.6 billion grant program designed to aid restaurants struggling with the year-plus fallout of COVID-19.

The Small Business Administration set an April target to begin taking applications, yet the exact date remains unclear.

The National Restaurant Association created a new Q&A email for operators to submit questions, rrf@restaurant.org.

And there’s been no shortage of inquiries. On Friday, it addressed some of the biggest ones.

To start, there are fresh items worth highlighting from when the program was announced.

Details are emerging on a new covered period, which might (might being the key word) be extended 14 additional months, as allowed by the legislation, until March 11, 2023.

The “eligible entity” definition may also have new context for bakeries, breweries, brewpubs, distilleries, taprooms, and wineries. The key language to circle: only if onsite sales to the public comprise at least 33 percent of gross receipts (in 2019 presumably). For inns, onsite sales of food and beverage to the public may need to comprise at least 33 percent of gross receipts.

Additionally, bankruptcy entities without approved plans for reorganization might be ineligible. Permanently closed entities, the same.

And the minimum grant award could be set at $1,000.

There are items with additional clarification, too:

For gross receipt totals in 2020, applicants might not need (again, might is the word) to include PPP loans, SBA debt relief, COVID-19-related economic injury disaster loans, also known as EIDL, EIDL advances, targeted EIDL advances, or any other state and local small business grants, via the CARES Act or otherwise. This specific point was a recommendation from the Association to the SBA.

READ MORE: Restaurant Revitalization Fund ‘Amazing Step,’ But Work Remains

PPP first-draw loans, returned before the Safe Harbor deadline, might not be counted against the grant fund amount (more gray areas). This was also a recommendation to the SBA from the Association.

Self-certification for Prioritization Eligibility is the likely path for targeted groups and differs from SBA certification for traditional loan programs.

As you can see, for a program on the apparent doorstep of taking applications, there are queries aplenty.

Let’s dive into some of the top questions the Association addressed in its FAQ.

So who is actually eligible for a RRF grant?

It’s stated as follows: entities that own a place of business where the public or patrons assemble for the primary purpose of being served food or drink. That almost sounds like a description of a tavern from the 1700s, but here’s what it entails:

• Restaurant, Food Stand, Food Truck, Food Cart
• Snack and Nonalcoholic Beverage Bar
• Caterer
• Bar, Lounge, Saloon, Tavern
• A licensed facility or premise of a beverage alcohol producer where the public may taste, sample, or purchase product
• Other similar place of business in which the public or patrons assemble for the primary purpose of being served food or alcohol

 

The following venues might have limited eligibility, which we’ll explore shortly:

• An Inn
• Brewery, Brewpub, Microbrewery, Taproom, Tasting room
• Bakery
• Winery
• Distillery

 

Here’s how the Association expects eligibility to be determined.

Inn

• Eligibility may be limited to entities that have onsite sales of food and beverage to the public of at least 33 percent of gross receipts.
• When applying, entities may need to share evidence of onsite sales.

 

Brewery; Brewpub; Microbrewery; Taproom; Tasting room

• Eligibility may be limited to entities that have onsite sales to the public of at least 33 percent of gross receipts.
• When applying, entities may need to share filed Tax and Trade Bureau reports for the gross receipts reporting period.

 

Bakery

• Eligibility may be limited to entities that have onsite sales to the public of at least 33 percent of gross receipts.
• When applying, entities may need to share filed Tax and Trade Bureau reports for the gross receipts reporting period.

 

Winery

• Eligibility may be limited to entities that have onsite sales to the public of at least 33 percent of gross receipts.
• When applying, entities may need to share filed Tax and Trade Bureau reports for the gross receipts reporting period.

 

Distillery

• Eligibility may be limited to entities that have onsite sales to the public of at least 33 percent of gross receipts.
• When applying, entities may need to share filed Tax and Trade Bureau reports for the gross receipts reporting period.

 

Sometimes, when trying to figure eligibility, it helps to look at what disqualifies as much as qualifies.

The follow circumstances would preclude an otherwise eligible entity from receiving an RRFG:

• As of March 13, 2020, the entity owns or operates (together with any affiliated business) more than 20 locations, regardless of whether those locations do business under the same or multiple names.
• The entity has received a Shuttered Venues Operations Grant (SVOG) or has a pending SVOG application.
• The entity is a publicly traded corporation or is majority owned and controlled by a publicly traded corporation.
• The entity does not have a place of business located in the U.S., does not operate primarily within the U.S., and does not make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
• The entity is a state- or local government-owned or operated business.
• The entity is permanently closed.
• The entity filed for bankruptcy under Chapter 7 or is liquidating under Chapter 11.
• The entity has filed for bankruptcy under Chapter 11, 12, or 13 but does not have an approved plan for reorganization.

 

Important to note, there is no requirement for a restaurant or venue to have been open before a particular date. If the unit was not open before January 1, 2020, it is still eligible for a grant. Even if it has not opened by the date of the application, it can apply for eligible expenses incurred in preparing to open.

For restaurants opened or planning to open after January 1, 2020, grant fund eligibility generally follows a formula similar to this: Eligible expenses incurred minus gross receipts minus PPP loans equals grant fund.

To the Association’s earlier point, the SBA might create a minimum grant amount of $1,000 for eligible entities. We just don’t know yet for certain. What we do know is the maximum grant amount is $5 million per location and $10 million total for an eligible entity.

The Association is also seeking clarification on whether or not a nonprofit organization that owns an eligible entity can apply for an RRFG. Current indications, the Association said, suggest they may not be eligible.

Venues that applied for and received a first draw and a second draw PPP loan can apply for an RRFG. However, the grant will be reduced by the total amount of PPP loans.

One of the lead points the Association fought for throughout the process was to open up the program to all model types. Mainly, to not exclude franchisees from applying and receiving grants.

The end result is franchise operators can access funds as long as they meet the other eligibility criteria.

Similar to the requirements for SBA financial assistance programs, the restraints imposed on a franchisee or licensee by its franchise or license agreement generally should not be considered in determining whether the franchisor or licensor is an “affiliated business” with an applicant franchisee or licensee provided the applicant franchisee or licensee has the right to profit from its efforts and bears the risk of loss commensurate with ownership, the Association said.

Which, naturally, brings us to the question of how is an “affiliated business” defined and what does it mean?

An “affiliated business” is a business that is itself an eligible entity and has an equity or right to profit distributions of not less than 50 percent in the RRFG applicant or the contractual authority to control the direction of the RRFG applicant as of March 13, 2020.

SBA “Affiliation Rules” do not apply. The statute included a definition for “affiliated business” so the SBA Affiliation Rules found at 13 C.F.R. 121.301 for financial assistance do not apply.

A current area of confusion, though, is if somebody owns a franchise, does their concept have to be on the SBA Franchise List to be eligible for an RRFG? The Association, which opposed the potential requirement, said it’s actively seeking clarity on the issue. So stay tuned.

Now, if a franchise restaurant is eligible for a grant until the rule but the franchisor is a publicly traded company, does it affect eligibility?

The answer is yes, as long as the RRFG applicant otherwise qualifies and the publicly traded company is not an “affiliated business” (for example, does not have an equity or right to profit distributions of not less than 50 percent or the contractual authority to control the direction of the business as of March 13, 2020).

To pull this back for a moment, in order to receive a grant, you must own or operate 20 or fewer establishments (together with any affiliated businesses), regardless of ownership type of the locations and whether those locations do business under the same or multiple names, as of March 13, 2020. Publicly traded companies are ineligible.

In sum, franchisees should be able to access funds if they check off the standard boxes.

Getting ready to apply

Restaurants and other venues should get these documents in order:

• An application form and the IRS Form 4506-T, as well as gross receipts documentation.
• Applicants in operation before January 1, 2019 must supply gross receipts for 2019 and 2020
• Applicants in operation through part of 2019 must supply gross receipts for 2019 and 2020
• Applicants that began operations on or between January 1, 2020 and March 10, 2021 and applicants that have not yet opened as of March 11, 2021, but have incurred eligible expenses, must supply documentation of gross receipts and eligible expenses for the length of time in operation.

 

Allowable documents to show gross receipts and, if applicable, eligible expenses, include:

• Business tax returns (IRS Form 1120 or IRS 1120-S)
• IRS Forms 1040 Schedule C; IRS Forms 1040 Schedule F
• For a partnership: partnership’s IRS Form 1065 (including K-1s)
• Bank statements
• Externally or internally prepared financial statements such as Income Statements or Profit and Loss Statements
• Point of sale report(s), including IRS Form 1099-K

 

A question the Association has fielded from operators is whether or not restaurants need to received a DUNS number and register at www.SAM.gov in order to apply for a RRFG.

They do not. On March 30, the SBA clarified this in order to streamline and simplify the application process.

It was welcomed news the RRF wouldn’t include the SAM (System for Award Management) registration process, which required notarized documents that were difficult to gather quickly. The process lacked multilingual support and experienced a backlog.

The SBA said it plans to award grants in the order in which applications are received.” Is that order based on the entities of different sizes based on annual gross receipts? For instance, the order in which applications are received comes down to each tranche of company size.

The Association’s explanation: Entities that can certify that they meet the definition of a woman-owned small business, veteran-owned small business, or socially and economically disadvantaged small business will be given priority for award if their application is filed with SBA within the first 21 days the application is open for submissions. Additional access may be defined in segments according to an entity’s annual gross receipts in 2019.

Perhaps another positive, at least in terms of how the first PPP round went, is that banks, local lenders, and community development financial institutions will not be involved in the RRFG. It will be administered entirely through the SBA. It’s expected the SBA will then deposit funds directly to the bank account identified in the restaurant’s application.

It is also possible the SBA could require disclosure of all owners with a combined equity of greater than 20 percent.

While we touched on it briefly, how much restaurants and other venues can receive is really the big ticket.

Entities can receive a tax-free federal grant equal to the amount of its pandemic-related revenue loss, subtracted by the total amount it received in all PPP loans.

Going deeper:

For entities opened before 2019:

[Gross receipts of 2019] – [Gross receipts of 2020] – [ Total amount received in PPP loans (1st and 2nd Draw)] = Restaurant Revitalization Fund Grant

For entities opened during 2019:

[Average monthly gross receipts of 2019 multiplied by 12] – [Average monthly gross receipts of 2020 multiplied by 12] – [Total amount received in PPP loans (1st and 2nd Draw)] = Restaurant Revitalization Fund Grant

For entities opened during 2020-2021:

[Eligible expenses] – [Gross receipts received] – [Total amount received in PPP loans (1st and 2nd Draw)] = Restaurant Revitalization Fund Grant

As previously outlined, aggregate grants made to an eligible restaurant, and any affiliated businesses of the eligible entity, are limited to $5 million per physical location and $10 million total for the eligible entity.

How the SBA calculates gross receipts is a long answer.

The Association:

Gross receipts mean all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.

Generally, receipts are considered “total income” (or in the case of a sole proprietorship “gross income”) plus “cost of goods sold” as these terms are defined and reported on IRS tax return forms—this includes Form 1120 for corporations; Form 1120-S for S corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form 1065 for partnerships; Form 1040, Schedule C for other sole proprietorships.

Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.

Subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes are not excluded from receipts.

The Association is actively seeking to exclude a few emergency funds from the process. PP loans, EIDL, advance grants from EIDL, SBA Section 1112 debt relief payments, targeted advance grants, and/or state and local small business grants. Are these included within gross receipts for 2020?

The Association said it’s unlikely they’ll be included in gross receipt calculations for RRFG. But, again, they’re working to make sure that’s the case.

Here are a few other common questions:

If I returned my 1st Draw PPP loan in whole before the applicable safe harbor deadline on May 18, 2020, is it deducted from my eligible grant amount?

The answer is no. If a restaurant returned its PPP loan during the “safe harbor” period, it will not be dedicated from the RRFG amount.

Is an EIDL deducted from eligible RRFG amounts?

No.

Is an EIDL advance grant or target advance grant deducted from eligible RRFG amounts?

Also no.

Are COVID-19 Employee Retention Tax Credits (ERTC) taken in 2020 and/or 2021 deducted from eligible RRFG amounts?

This is a no as well. However, a restaurant is restricted from collecting EERTC for any “eligible wages” paid with RRFG funds.

More on prioritization

This is an essential part of the program for a few reasons. One, we all remember what happened the first time the PPP rolled around and who was included, and who was not. This improved vastly in the other rounds, but the scars, especially with independents and small operators, linger.

So let’s look at some lead points:

How is a small business concern “owned and controlled by women” defined?

An eligible small business concern owned and controlled by women must one, meet the SBA’s Size Standard requirements for a small business concern; two, be at least 51 percent owned by one or more women; and three, have the management and daily business operations controlled by one or more women, the Association explained. The concern must also qualify as small under the SBA Size Standards corresponding to the 6-digit North American Industry Classification System (NAICS) code. Eligible applicants might need to self-certify to meet all elements of this definition and follow other criteria established by SBA.

How is a small business concern “owned and controlled by veterans” defined?

More from the Association: An eligible small business concern owned and controlled by veterans must one, meet the SBA’s Size Standard requirements for a small business concern; two, be at least 51 percent owned by one or more veterans; and three, have the management and daily business operations controlled by one or more veterans. The concern must also qualify as small under the SBA Size Standards per the 6-digit NAICS code. Eligible applicants might need to self-certify to meet all elements of this definition and follow other criteria established by SBA.

How is a small business concern “owned and controlled by socially and economically disadvantaged individuals” defined?

This gets a bit more complicated.

An eligible small business concern owned and controlled by socially and economically disadvantaged individuals must be at least 51 percent unconditionally owned by one or more socially and economically disadvantaged individuals. While this is not yet defined in regulations, the Association said, both prongs of social and economic disadvantage are necessary under this statute. The concern must also qualify as small under the SBA Size Standards corresponding to the 6-digit NAICS code.

The Association said it expects the SBA to follow the general regulatory requirements for socially disadvantaged individuals by requiring a self-certification that the individual(s) have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities. Individuals who are members of the following groups are normally presumed to be socially disadvantaged: Black Americans; Hispanic Americans; Native Americans (including Alaska Natives and Native Hawaiians); Asian Pacific Americans; or Subcontinent Asian Americans. Economically disadvantaged individuals are those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared with others in the same business area who are not socially disadvantaged.

Eligible applicants might need to self-certify to meet all elements of this definition and follow other criteria established by SBA.

Understanding eligible expenses

Core to the RRF and why it carries such optimism along with it, versus past programs, is how restaurants can deploy funds. With the PPP, 60 percent had to go to payroll expenses, which was an improvement from the day one 75/25 split.

Eligible expenses for RRFG, however, include the following: Payroll; payments of principal or interest on any mortgage obligation (excludes prepayment of principal on a mortgage obligation); rent (excludes prepayment of rent); utilities; maintenance expenses such as construction to accommodate outdoor seating and walls, floors, deck surfaces, furniture, fixtures, and equipment; supplies such as protective equipment and cleaning materials; food and beverage expenses that are within the scope of the normal business practice of the eligible entity before the covered period; covered supplier costs; operational expenses; paid sick leave; any other expenses that the SBA determines to be essential.

Restaurants can use grant funds for eligible expenses incurred from February 14, 2020, until December 31, 2021. Going back to one of the opening points, the SBA might just extend that covered period an additional 14 months, until March 11, 2023. It has the authority to extend it up to two years after enactment of the RRFG program.

So what happens if the restaurant does not spend all of the grant money by the end of the covered period, or permanently ceases operations on or before the date (whenever that ends up being)?

In that case, the entity would have return the unused funds to the U.S. Department of Treasury.

The Association said it’s seeking clarification on if food and beverage expenses—within the normal business practice of the entity—include alcohol.

If entities who met eligible expenses put them on a personal- or business-line of credit—can the entity pay the credit card bill to satisfy the eligible expense? If so, is the interest on this transaction included as an eligible expense?

This is another point the Association is looking for clarity on, but said it’s likely debt services will be an eligible expense for RRFG.

Is the repayment of SBA 7(a) loans, PPP loans or EIDLs an eligible expense?

Once more, clarity isn’t clear yet. Yet the Association expects debt services to be an eligible expense.

Some tax points to close

Here are a few tax questions the Association has tackled:

Will the RRFG be taxed as federal gross income?

Grants will not be included as federal taxable gross income by the IRS

Will entities be able to deduct federal tax expenses paid with RRFG funds?

Yes, the law states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”

Can a state tax RRFG funds or disallow standard and necessary tax deductions on expenses paid with RRFG funds?

A state may be able to increase an eligible entity’s state tax liability associated with its acceptance of a federal RRFG. It will be important for an entity to be aware of its state’s tax conformity with the federal code and how its state plans to treat the RRFG funds. Many states automatically accept changes to the federal tax code, which protect the tax status of RRFG

How are different organizations situated for RRFG?

Non-taxable income on the grant is added to the basis for S Corp shareholders and the partner’s basis in a partnership.