Top tax tips for restaurants

Among the key provisions with the potential to have the most profound impact on your business:

Depreciation Incentives

Fixed assets can be a significant cost when opening a new location or remodeling an existing location. The Act increases the 50 percent bonus depreciation deduction to 100 percent for qualified investments made after September 8, 2010 and before January 1, 2012. This provision allows the taxpayer to expense, in the year placed in service, 100 percent of the cost of never-before-used fixed asset additions, without any limitations. In general, qualifying additions are property depreciable under Modified Accelerated Cost Recovery System (“MACRS”) with a recovery period of 20 years or less, including certain off-the-shelf software.

Qualified real property improvements are not included in the bonus depreciation provisions above but may qualify for the expanded Internal Revenue Code (“IRC”) Section 179 deduction. Pursuant to the new Act, a taxpayer may elect to have $250,000 of the total $500,000 Section 179 limit applied to qualified leasehold, qualified restaurant, and qualified retail property improvements placed in service for tax years beginning in 2010.

If new construction or improvement costs are significant, a cost segregation study can be very useful in identifying qualifying property for these provisions and identifying assets with shorter depreciable lives.

Keep in mind that many states, such as California, offer limited or no conformity to these Federal provisions, and neither Connecticut, New Jersey, New York State, nor New York City allow bonus depreciation.

Tax Credit Incentives

Tax credits are often overlooked but quite numerous in both Federal and state tax arenas.

Research and development (“R&D”) credits have a long history of extensions. For example, though not necessarily applicable to restaurants, there may be applications related to self-created software and certain production processes (i.e., those used in breweries). The R&D credit was extended through December 31, 2011.

The Work Opportunity Tax Credit, available to employers who hire individuals from certain targeted groups, has been extended for hires beginning employment after August 31, 2011 and before January 1, 2012. There are also Federal and state Enterprise and Empowerment Zone credits available to employers for certain qualifying employees.

The HIRE Act, also passed in 2010, provided a significant provision that gave a payroll tax holiday for employers that, in general, hired a worker, after February 3, 2010, who was not employed for more than 40 hours during the 60-day period prior to the hire by the taxpayer. Under the Act, the employer did not have to pay its share of Social Security tax on the qualifying employee’s salary for theremainder of 2010. If the employer failed to claim the exclusion on the original return it is possible to amend 2010 payroll tax returns for the period in which the qualified employee was hired and subsequently claim the exclusion. Additionally, if the employee remained on the payroll for a continuous 52-week period, the employer would be eligible for a non-refundable income tax credit of up to $1,000, per employee, on their 2011 tax return. Be sure to have the employee complete IRS Form W-11 certifying they were unemployed for the 60-day period. Another employment-based credit, primarily applicable to small employers with ten or fewer employees, is the tax credit of up to 35 percent of an employer’s contribution toward the employee’s health insurance costs.

The Act also extended many energy credits. For example, when a restaurateur opens a new location or plans a remodel, consideration should be given to the credits for reduced energy consumption.

Other Restaurant Industry Tax Issues

FICA: The Act requires employers to adjust the amount withheld for Social Security’s Old Age, Survivors, and Disability Insurance (“OASDI”), also known as Social Security tax. The OASDI tax rate for wages paid in 2011 is set by statute at 4.2 percent for employees, a decrease of 2.0 percent from the 2010 rate of 6.2 percent.The rate for the employer match portion has not changed and remains at 6.2 percent.

Employee Meals: Is your restaurant properly treating the value of meals furnished to employees before, during, and after work hours? Generally meals provided during working hours, for the convenience of the employer, are not considered taxable gross income to the employee and are 100 percent deductible by the employer.

Gift Cards: Has your restaurant conformed to the new rules regarding sales of gift cards after August 22, 2010? These rules require the restaurant to make gift cards valid for at least five years, provide additional rights to consumers with respect to expired cards, and meet additional disclosure requirements. Does your restaurant report revenue received from gift card sales in accordance with IRC Section 451 and is it eligible for a possible one- or two-year deferral of recognition of such revenue pursuant to Revenue Procedure 2011-18?

Wholesale Sales: If your restaurant makes wholesale sales, have you determined if you qualify for the IRC Section 199 deduction, which provides a taxpayer a deduction for gross receipts derived from qualifying products significantly manufactured in the United States?

Charitable Donation of Food Inventory: If your restaurant has excess “wholesome food” inventory it may qualify for an enhanced charitable deduction, in general equal to the lower of the tax basis of the donated property plus 50 percent of such property’s appreciation or twice the tax basis of the property, for such qualified donations made through December 31, 2011.

Lease Considerations: If your restaurant leases its location and receives tenant allowances, are these being accounted for correctly pursuant to IRC Section 110? In certain situations, cash allowances or rent reduction amounts may be excluded from taxable income.

If your restaurant incurred smallwares expenses, are you accounting for them as currently deductible pursuant to Revenue Procedure 2002-12?

Internet Sales and Tax Collection: Does the restaurant have internet sales and if so, are such sales subject to sales tax? Has the restaurant properly addressed the issue of sales tax with respect to complimentary meals and discount coupons? Many states have different rules with respect to the treatment of these items for sales tax purposes.

As mentioned before, these are only a few of the many tax-related issues applicable to the restaurant industry. Going through a tax check-up with your CPA could identify opportunities that could significantly reduce your tax liability.

Combining a tax check-up with proper management of labor and food costs, inventory control, employee theft, menu selection, pricing and concept branding, an owner can achieve success in a very competitive and ever-changing industry.