While companies in the restaurant industry face certain tax-related issues as a result of recent regulations, they are also more uniquely poised to take advantage of certain tax-saving opportunities. Restaurants should pay particular attention to the items below. Proper planning around these items is important to maintain compliance, maximize future benefits, and manage cash flow.
Common tax issues
The Patient Protection and Affordable Care Act will have a big impact on companies in the coming years. One condition of the act requires employers to provide health insurance coverage for their employees. Beginning in 2014, if a company is considered a "large" employer and does not provide health insurance coverage, it could be subject to penalties. A large employer is defined as having 50 or more full-time-equivalent employees. If the company currently offers health insurance, the new requirement could have little impact. However, if the company does not offer health insurance, there may be extensive costs to provide health coverage for employees. Penalties will be assessed when any one employee receives a premium tax credit which is available to employees meeting income requirements and without access to adequate employer-provided health insurance. The penalty for not providing insurance is $2,000 per full-time employee annually. The first 30 employees are excluded from the penalty. The healthcare mandate should be assessed now in order to prepare for the 2014 changes and avoid costly penalties.
As the purchase and use of gift cards has significantly increased in popularity, the IRS has focused more on compliance. The taxation of gift cards was designated by the IRS as an area with considerable compliance risk. Amounts received for the sale of gift cards must be included in income in the year of receipt, which may not be the same year the gift card is redeemed. However, taxpayers have the ability to elect a one-year income deferral method. Under this method, revenue from unredeemed gift cards can be deferred to the first taxable year following the year of receipt. In order to defer gift card revenue, taxpayers may have to file a change in accounting method. Restaurants in particular should give special attention to the tax treatment of gift cards to ensure they are in compliance and take advantage of income deferral opportunities.
Repairs and maintenance:
Restaurants often have significant investments in buildings, leasehold improvements, furnishings, and equipment that frequently require repairs and remodels. At the end of 2011, the IRS introduced revised regulations for capitalizing repair and maintenance expenditures. Companies should analyze expenses related to acquiring, maintaining, or improving property to determine if they are currently deductible as an ordinary business expense or treated as a capital improvement and depreciated over a period of time. Generally, expenses that better property, adapt property to a new or different use, or restore the property should be capitalized. Routine maintenance performed to keep property in its original operating condition can be expensed. In order to comply with the new regulations, companies may need to file an election to change their current method of accounting. By taking advantage of the new repair and maintenance standards, companies can accelerate tax deductions which will decrease taxes and improve cash flow. Restaurant taxpayers who renovate property on a relatively regular basis need an understanding of these regulations or they risk missing out on tax-saving opportunities.
A cost segregation study is an in-depth analysis of fixed asset expenditures that identifies proper cost recovery periods for tax depreciation purposes. Typically, restaurant building components are classified as having longer depreciation recovery periods of 15 to 39 years. In a cost segregation study, certain items may be identified as having a shorter recovery period of 5 or 7 years. A shorter recovery period would accelerate depreciation expense and result in reduced current income tax liabilities. Some examples of property that can be classified as 5- or 7-year assets under a cost segregation study are certain flooring, lighting, and electrical components. Cost segregation studies can be done on new construction, remodels, or existing property. As restaurants frequently undergo renovations, these companies have more opportunities to complete cost segregation studies and, as a result, reduce taxable income.
Many restaurants are eligible for one or more of the following tax credits:
- Credit for employer Social Security and Medicare taxes paid on certain employee tips. Companies can claim a credit for Social Security and Medicare taxes paid by the employer on employee tips. The credit is available for tips exceeding $5.15 per hour. The portions of tips needed to bring an employee’s wages to the required minimum of $5.15 per hour are not eligible for the credit.
- Work Opportunity Tax Credit. Companies can claim the credit for first- or second-year wages paid to targeted group employees during the tax year. Qualifying employees include veterans, ex-felons, welfare recipients, and summer youth employees. Certification is required to prove the employee is a member of the targeted group. This credit is only currently available through 2013.
- Credit for small employer health insurance premiums applicable for tax years 2010 to 2013. Companies can receive a credit for 35 percent of health insurance premiums paid on behalf of the company’s employees. The company must have fewer than 25 full-time-equivalent employees, pay average annual wages of less than $50,000, and have a health insurance plan that requires the employer to contribute at least 50 percent of the premium cost. Beginning in 2014, eligible small employers who purchase coverage through a state-run insurance exchange are eligible for a credit up to two years.
As a national accounting and advisory firm with more than 20 years of experience serving the restaurant industry, Baker Tilly has the resources to address your tax needs. Our team of specialists works directly with companies to help them navigate the complexities of tax law, provide solutions to difficult problems, and create dynamic and effective tax strategies.