SBA Issues Restaurant Revitalization Fund Program Guide

Thoughtware Alert Published: Apr 19, 2021
SBA TAX Restaurants TW Image

On Saturday afternoon, April 17, the U.S. Small Business Administration (SBA) posted to its website a program guide, knowledge base, and application form (Form 3172) for the Restaurant Revitalization Fund (RRF) program that was authorized under the American Rescue Plan Act (ARPA). For more information on the $28.6 billion RRF program, see this prior BKD Thoughtware® article. The guide contains a number of clarifications of ARPA provisions as well as guidance from the SBA Administrator under discretionary provisions given to the SBA Administrator under the ARPA. The preamble to the guide states that additional post-award guidelines would be issued at a later date. The guide confirms that all grants awarded through the RRF must be used for eligible uses no later than March 11, 2023. This date was the latest that the SBA Administrator could select under the discretion given under the ARPA.

Eligible Entities

The guide lists various entity types (including a few that were not specifically listed in the ARPA legislation) that are deemed to be eligible entities (EE). To be an EE, a business must not be permanently closed at the time of the application. These entity types include:

  1. Restaurants
  2. Food stands, food trucks, food carts
  3. Caterers
  4. Bars, saloons, lounges, taverns
  5. Licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products
  6. Snack and nonalcoholic beverage bars
  7. Bakeries
  8. Brewpubs, tasting rooms, taprooms
  9. Breweries and/or microbreweries
  10. Wineries and distilleries
  11. Inns
  12. Other similar place of business in which the public or patrons assemble for the primary purpose of being served food or drink

For entities falling in categories 7 through 11, the applicant must submit documentation with its application that on-site sales to the public made up at least 33 percent of gross receipts in 2019. Applicants in category 11 (Inns) must provide documentation with the application that on-site sales of food and beverage to the public made up at least 33 percent of gross receipts in 2019, which might be a tough qualification to meet for an inn that has room sales as well. Entities in categories 1 through 6 in the above list are presumed to meet the 33 percent test and no additional eligibility documentation is required for those applicants. There is, however, a certification that all applicants must make stating they are eligible to receive the funding under the rules in effect at the time the application is submitted. For all entity types, if a business opened in 2020 or has not yet opened, the applicant’s original business model must have contemplated achieving the 33 percent requirement.

The SBA Administrator also added as an EE any of the above listed entities that are a tribally owned concern or operate independently inside another business, such as inside a hotel or conference center. “Independently” is defined as having its own tax identification number. Pages 4 through 6 of the guide provide a very concise list of categories and what attributes in each category would make an entity eligible or ineligible. A few notable items from the matrix:

  • Any state or local government-operated business is not eligible.
  • Businesses that are “opening soon” are eligible if costs have been incurred as of March 11, 2021.
  • Registration at SAMS.gov and a DUNS number are not required (given the underwhelming success of this requirement under the Shuttered Venue Operators Grant (SVOG) program, this is not too surprising).
  • If an applicant has already received a Paycheck Protection Program (PPP) loan at the time of the application, any RRF awarded will be reduced by the loan amount. Given this was specified in the ARPA, this is not a surprise. What is surprising is the parenthetical that states if an entity has an outstanding PPP loan application at the time of the RRF application, the PPP application should be withdrawn. Given that the next sentence states that the applicant is verified using EIN/TIN/SSN, “should be” is actually “must.” This is an unexpected provision, and very similar to the one in the SVOG program where the applicant is effectively forced to make a tough call—roll the dice on receiving an RRF or take the more certain route (albeit, likely with less funding) of a PPP loan.
  • If a potential applicant received an SVOG or has a pending application for an SVOG, they are ineligible for RRF. Once declined for the SVOG, the applicant may then be eligible for the RRF.
  • Nonprofit organizations are not eligible.
  • Franchises must be listed on the SBA Franchise Directory to be an EE. If not listed, the entity may still be able to meet the qualification, but it will be a much more difficult path. If the franchise is not listed, all franchise documents and other documents must be submitted to franchise@sba.gov for review of SBA’s other eligibility criteria. Effectively, due to timing, this will not happen.
  • Minimum funding is $1,000. This is net of any required reductions in the funding amount. For example, if an applicant has a pandemic revenue reduction of $4,000 but received a PPP loan of $3,500, the net funding request is $500, so the application would be denied.

Certification

The same need certification surfaces here as well. All applicants will certify that current economic uncertainty makes this funding request necessary to support the ongoing or anticipated operations of the applicant.

Calculation of Funding Amount

In the preamble to this section, the guide provides for the ability to make corrections to submissions and pre-award funding. In no event, however, will any corrections be allowed after awards have been paid. While the guide allows for corrections, it does provide a warning that submission of new information or changes to requested grant amounts will put the applicant to the back of the line, effectively starting the timeline over. Given the RRF program is first-come, first-served by statute, the benefits of the correction need to be analyzed very carefully.

The application form provides three calculation methods for determination of the funding amount. All three have the phrase “were in operation” as a key qualifier. In operation is specifically deemed to mean “making sales,” not when an entity was formed or incurring preopening costs.

One other important factor in this guide relates to the definition of gross receipts. Specifically excluded from the definition are the following items that have not been excluded in such a specific manner under other programs:

  • PPP loans (both first and second draw)
  • SBA Section 1112 payments (the SBA program that was to make up to six months of payments for a borrower under certain SBA loans)
  • Economic Injury Disaster Loans (EIDL) and advances
  • Any state and local small business grants (via CARES Act or otherwise)

A summary of the three calculations follows:

  • Calculation 1 (Table 1 from the grant application) – this calculation is available for EEs that were in operation on or before January 1, 2019. Gross receipts are determined by reference to the federal income tax return for the 2019 tax year and for the 2020 tax year. If the 2020 tax year is not filed at the time of the application, amounts “to be reported” on the return may be used. Similar to PPP, the definition of gross receipts in the guide refers to specific lines on the income tax return. For example, on Form 1065, Partnership Return, the gross receipts reference is to line 1(c).

    From the difference between the two gross receipts amounts, subtract any PPP loans (first or second draw) received regardless of the year of receipt. If the net result is more than $5 million per location, limit the amount to the $5 million. The total funding amount, when combined with affiliates, cannot exceed $10 million.
     
  • Calculation 2 (Table 2 from the grant application) – this calculation is available to EEs that began operations partially through 2019. This calculation is identical to Calculation 1 above except that the gross receipts reported on the 2019 tax year federal income tax return are annualized by determining the monthly average and annualizing that amount. The remaining steps are the same as described above in Calculation 1.
     
  • Calculation 3 (Table 3 from the grant application) – this calculation is for EEs that began operations between January 1, 2020, and March 10, 2021, and those that have not yet begun operations as of March 11, 2021, but have incurred eligible expenses. In this calculation, there are no 2019 gross receipts to compare to. In place of the 2019 gross receipts, the applicant is to use eligible expenses incurred on or between February 15, 2020, and March 11, 2021. Subtract 2020 and 2021 (through March 11, 2021) gross receipts from this total, regardless of when in 2020 operations began. Similar to the above calculations, these are the gross receipts as reported or to be reported on the applicant’s Federal tax return. From this point, the calculation is the same as the above two calculations. Eligible expenses have the same meaning as used in defining what the RRF grants can be spent on.

Eligible Use of Funds

This generally follows the listing in the ARPA but with a few notable additions:

  • The ARPA allowed payment of principal and interest on mortgages of the business (excluding prepayment of principal). The guide expanded that to include principal and interest on business debt service (excluding prepayment of principal and interest). This may not capture as much additional debt as one might first think, as a mortgage can be on either real or personal property and would encompass most restaurant debt.
  • The definition of utility costs was expanded, but it was unlikely to be surprising. The guide specifically includes internet access. It also added a requirement that service must have started before March 11, 2021.
  • Inventory purchases of food and beverages are an eligible use. The guide further clarified that raw materials used for beer, wine, or spirits are eligible.
  • The guide provides a good clarification on eligible supplier costs. The contract, order, or purchase order must only be in effect at any time before the receipt of the RRF. If the supply item is a perishable good, the time period is before or at any time during the covered period, i.e., prior to March 11, 2023.
  • The guide provides examples of the catch-all category of Operational Expenses. This truly is an all-encompassing category as it covers practically all business expenses incurred through normal business operations that are necessary and mandatory for the business. The only prohibition is the term does not include expenses incurred outside of the EE’s day-to-day operations.
  • Past-due expenses that would be an eligible use if incurred during the covered period are an eligible use if incurred beginning on February 15, 2020, and ending on March 11, 2023.

Interim Reporting

This provision appears to be another use of discretion by the SBA Administrator. As noted earlier, a grant recipient has until March 11, 2023, to spend the grant on eligible uses. Not later than December 31, 2021, the SBA Administrator will require all grant recipients to report, via the application portal, how much of the grant has been spent on each category of eligible uses of funds. This reporting will continue annually until the recipient has expended the funds or the period for performance expires (earlier of March 11, 2023, or permanent closure and certain bankruptcies). Once the funds have been fully expended, a simple certification (via the application portal) that the funds have been used on eligible expenses is the only procedure that appears to be needed to close out the award. However, the SBA reserves the right to request additional documentation to validate the certification.

How to Apply

The SBA devised three methods to apply for an RRF:

  • Through a recognized SBA Restaurant Partner – These are partnerships the SBA established with certain tech companies that provide POS and other back-office services to the restaurant industry. Think of these like a payroll processor for the operational side of the business. These partners will essentially function in the same intake role that lenders did on the PPP loans. Each will have individual portals and may require differing information. The benefit to using a recognized SBA Restaurant Partner is they have all gross receipts data and the SBA will allow the use of this data in determining the gross receipts decline for the amount of the grant request. SBA is adding new partners in the coming weeks and will be updating its website.
     
  • Directly Through the SBA – The SBA has set up a dedicated application portal on its website. This site will require an applicant to set up an account, complete the online application, and upload all required documents. SBA has stated it will take approximately 14 days to review a complete application package.
     
  • Apply by Telephone Via the SBA – This could be a very onerous process, requiring the applicant to phone the SBA line at 844.279.8898 and complete the application with a support agent. The forms are then mailed to the applicant for signature and returned with all documentation to the SBA. Given the time delays in the mailing process, this should be the option of last resort.

Determination of the Applicant

There are limited but meaningful examples of who the applicant should be in various situations. The EIN will generally control this.

  • A restaurant with multiple locations under the same EIN must apply for all locations in one single application.
  • Conversely, if an entity owns three restaurants, with each having its own EIN and filing a separate federal return, then the three restaurants must separately apply for an RRF.
  • The applicant must provide the TIN for the applicant and all equity owners of 20 percent or more. If no owner has at least 20 percent equity ownership, the applicant must list enough owners whose combined equity represents at least 20 percent.

Set-Asides

The ARPA set aside $5 billion for applicants with 2019 gross receipts of not more than $500,000 and gave the SBA Administrator authority to further allocate grants based on additional receipts levels. Accordingly, the SBA provided two additional set-asides:

  • $4 billion for applicants with 2019 gross receipts from $500,001 to $1.5 million
  • An additional $500 million for applicants with 2019 gross receipts of not more than $50,000

Priority in Awarding Funds

For the first 21 days of the program, the SBA will accept applications from all applicants. During this period, however, it will only distribute funds for approved applications for applicants that self-certified they meet the eligibility requirements for a small business concern owned by women, veterans, or socially and economically disadvantaged individuals. This is defined as at least 51 percent owned and controlled by one or more individuals who are a member of one or more of the aforementioned groups.

Required Documentation

The following documentation is required with the application.

  • The documentation supporting gross receipts will depend on when the applicant began operations.
    • If in operation all of 2019 and 2020, support of annual gross receipts is required.
    • If the applicant began operations partially through 2019 and is using calculation 2 described above, the applicant must submit proof of the 2019 and 2020 receipts. However, if calculation 3 is used, only documentation of 2020 gross receipts is required.
    • Applicants that began operations on or between the period beginning January 1, 2020, and ending on March 10, 2021, and applicants that have not 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 operations.
  • Specific items accepted as support for gross receipts include:
    • Business income tax returns (Forms 1120, 1120-S, 1065)
    • Form 1040, Schedule C
    • Bank statements
    • Externally or internally prepared income statements
    • POS reports, including Form 1099-K
  • All applicants also must provide the following:
    • The completed, initialed, and signed Form 3172
    • Form 4506-T, Verification of Tax Information (digital completion of the form on the SBA portal will satisfy this requirement)

See the earlier outline of documents required for certain categories of EEs.

Affiliate & Affiliated Business

This definition is critical for the determination of eligibility, most notably in the determination of the 20 physical locations limitation. The exact definition is as follows:

An Affiliated Business or affiliate is a business in which an eligible entity has an equity interest 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. [emphasis added]

The key here is the definition of an eligible entity, which refers only to the entities that are eligible to apply for a grant, e.g., restaurant, food truck, etc. Nowhere does the definition refer to an individual. So, if an individual owns multiple eligible entities, it would appear that all eligible entities would not have to be combined if the only relationship is the common ownership by the individual who is not an eligible entity. This may require further clarification from the SBA as it seems contrary to what we would expect. Take further caution regarding the request for the TINs of any 20 percent or greater equity owner at the time of application, as noted above.

Be sure to review the other definitions on the last four pages, which are worth a quick read.

While not yet live, the SBA’s RRF application portal indicates it will open soon. The SBA also issued a news release indicating it will establish a seven-day pilot period for the RRF application portal in advance of the application launch. Participants in the pilot will be randomly selected from existing PPP borrowers in priority groups for the RRF and will not receive funds until the application portal is open to the public.

For additional guidance, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.

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