Is the Restaurant Revitalization Fund Taxable?

The Restaurant Revitalization Fund (RRF) was a grant program designed to provide financial assistance to restaurants, bars, and other qualifying food service businesses that suffered significant revenue losses due to the COVID-19 pandemic. Administered by the Small Business Administration (SBA), the program offered funds to cover a wide range of operating expenses. The arrival of these funds created tax questions for business owners regarding how to treat the money on their federal and state tax returns.

Federal Tax Treatment of RRF Grants

For federal income tax purposes, grants awarded from the Restaurant Revitalization Fund are not considered gross income. This tax treatment was established by the American Rescue Plan Act of 2021 (ARPA), the same legislation that created the RRF program. This exclusion is a benefit, as grants received from the government are often taxable unless a specific legislative exception is made.

The ARPA provided this direct exception for the RRF, mirroring the treatment of other pandemic-era relief like the Paycheck Protection Program (PPP) loans that were forgiven. The Small Business Administration administered the $28.6 billion program, providing grants of up to $5 million for individual restaurants and $10 million for restaurant groups. This allowed businesses to apply the full grant amount toward their pandemic-related revenue losses without setting aside a portion for federal income taxes.

Deductibility of Expenses Paid with RRF Funds

A separate but related benefit is that ordinary and necessary business expenses paid for with RRF grant money remain fully deductible on a business’s federal tax return. In some other contexts, expenses paid with tax-free income are not deductible. The American Rescue Plan Act specifically allows for this dual benefit: the income is not taxed, and the expenses paid with that income can still be used to lower any other taxable business income. For instance, if a business used its grant to cover payroll, rent, and utilities, the full amount of those payments can be deducted as business expenses.

Eligible expenses covered a broad range of operational needs, including:

• Payroll costs
• Payments of principal or interest on any mortgage obligation
• Rent payments
• Utilities
• Maintenance expenses
• The purchase of supplies like personal protective equipment (PPE)
• Food and beverage inventory
• Covered supplier costs
• Operational expenses

State-Level Tax Implications

While the federal tax treatment of RRF grants is clear, the situation at the state level is more complex. States have their own tax laws and do not always align, or conform, with the federal Internal Revenue Code. This means that an RRF grant is not automatically tax-free on a business’s state income tax return.

State tax conformity generally falls into a few categories. Some states have “rolling conformity,” meaning they automatically adopt most changes to the federal tax code as they are enacted. In these states, the RRF grant was likely treated as non-taxable without requiring new legislation. Other states have “static conformity,” where they conform to the IRC as of a specific date, which may have been before the American Rescue Plan Act was passed. These states often had to pass specific legislation to exclude RRF grants from state taxable income.

A number of states did pass laws to conform to the federal treatment, making the grants tax-free for state purposes as well. However, some states did not conform, meaning businesses in those locations could owe state income tax on the grant funds they received. Business owners should verify the rules for their specific jurisdiction, and the most reliable source of information is the state’s own department of revenue or a qualified tax professional familiar with that state’s laws.

Tax Reporting and Documentation Requirements

Even though the RRF grant is not taxable at the federal level, it must be properly accounted for in a business’s financial records and on its tax return. This creates a clear paper trail that can prevent questions or inquiries from the IRS.

The specific method for reporting can vary depending on the business structure and tax form used, such as a Schedule C for sole proprietors, Form 1120 for corporations, or Form 1065 for partnerships. A common accounting practice is to include the grant amount in gross receipts or as an “other income” item and then subtract the same amount on a separate line described as “non-taxable RRF grant.”

Record-keeping is necessary to support the use of the funds. Businesses should retain all documents related to the grant, including:

• The official grant award notification from the SBA
• Bank statements showing the deposit of the funds into the business account
• Detailed receipts, invoices, and payroll records for every expense paid for with the grant money

These documents serve as proof that the funds were used for eligible expenses by the program’s deadline, which was March 11, 2023.