15,000 California Restaurants and Bars Face an Unexpected Tax on Pandemic Era Grants

By Brandon Drey
Brandon Drey
Brandon Drey
Brandon Drey is a California-based reporter for The Epoch Times.
January 12, 2022 Updated: January 13, 2022

SACRAMENTO, Calif.—An unexpected state income tax from a pandemic-era federal grant could impact more than 15,000 food and beverage establishments financially.

“This could be the largest cost any business has in the entire year,” Craig Winchester, partner at Perceptive Tax Advisory Group, told The Epoch Times. “It’s akin to almost the entire payroll cost—about a 10 percent tax on some of these grants.”

Under President Joe Biden’s American Rescue Plan Act—which was signed into law last year—the U.S. Small Business Administration (SBA) approved $28.6 billion in tax-exempt grants through the Restaurant Revitalization Fund program for restaurants, bars, and other businesses that serve food and drinks.

According to the SBA, the Restaurant Revitalization Fund distributes grants to replenish certain expenses like payroll and rent for the period between February 2020 through December 2021.

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Women reflect off a window while dining outside in Fullerton, Calif., on Dec. 22, 2020. (John Fredricks/The Epoch Times)

Of the more than 36,000 eligible businesses that applied for the grant in California, well over 15,000 were accepted.

Each business received grants—ranging up to $10 million—totaling approximately $5.7 billion in the state’s share of the award money.

While federal law exempts recipients from having to pay taxes on these grants, California law does not specify such an exemption.

“What [the restaurant owners] didn’t realize is that not every state conforms to federal law,” Winchester said. “They thought that they had this money to help them sustain during the tough times, but now this could be just another nail in the coffin.”

This could result in an unforeseen cost of over $600 million in state income taxes that could hit the hospitality service industry, as reported by Winchester in the California Globe.

However, California State Treasurer Fiona Ma said the state has been “good” about refraining from over-penalizing small businesses and doesn’t believe California lawmakers would allow the tax to go through.

“These are people that are struggling and suffering, and they’re getting assistance from the federal government,” Ma told The Epoch Times. “They shouldn’t be taxed on it—not enough that they’re not able to open. They’re having a hard time keeping their employees on staff.”

On Jan. 10, Gov. Gavin Newsom released his proposed budget summary for 2022–2023, stating the state’s taxes “generally conform” with the federal treatment of grants, especially when it will “assist businesses with their 2021 tax liabilities.”

While recipients of the program may be relieved after hearing Newsom’s proposal, Winchester advised against claiming victory until it goes through the required steps to change the law.

“The biggest impediment to this is going to be false confidence it will happen,” he said.

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Tavern House Kitchen and Bar offers fine dining in Newport Beach, Calif., on Sept. 9, 2020. (John Fredricks/The Epoch Times)

According to the National Restaurant Association, statewide COVID-19 lockdowns, protocols, and restrictions resulted in an estimated $250 billion loss in revenue for restaurants, bars, and other food-related establishments—10 times the amount in the aid distributed through the program.

“If these 15,000 businesses didn’t receive the Restaurant Revitalization Funds, many of them would not be in business,” Jot Condie, president and CEO of the California Restaurant Association, a nonprofit organization representing more than 22,000 members, told The Epoch Times.

“Now they’re dealing with a second wave iteration of the crisis, in terms of these variants,” Condie said. “We’re sort of in a soft lockdown right now. The government isn’t shutting restaurants down, people are choosing to stay away.”

Condie said that following discussions with California lawmakers and budget-writing committees, the nonprofit is hopeful the grant money will be treated like other pandemic-era-related grants such as the Paycheck Protection Program and the Economic Injury Disaster Loan, both of which exempted federal and state income taxes.

However, the California Restaurant Association and other California nonprofits continue to monitor how the program’s tax law evolves over the next couple of months.

“I can imagine that we would mobilize and force and speak up to the powers that be—whether it requires state legislation—to direct the treasurer to exempt that income,” Tracy Hernandez, founding CEO of BizFed, a nonprofit organization established in 2008 that represents 180 business networks in Southern California, told The Epoch Times.

“There would definitely be a loud crying movement. I can’t imagine any of the state assembly or senators choosing to say, ‘No, we’re going to penalize.’ That wasn’t the intent at all—it was to be a lifeline to restaurants.”

Brandon Drey
Brandon Drey is a California-based reporter for The Epoch Times.