Not many restaurant owners are thinking about their Restaurant Taxes right now. That’s okay, we think about them all the time. In this blog, Gavrilov & Co serves up a demystified menu of help with your restaurant taxes and issues. We know NYC restaurateurs are busy preparing for a big Valentine turn-out this week. In fact, we know that 32 percent of Americans visited a restaurant on Valentine’s Day, 2018. And in NYC alone, Valentine dinner restaurant sales rose deliciously, to 22%.
Save These Demystified Restaurant Tax Tips and Issues
Don’t worry, restaurant owners, after your Valentine rush, our restaurant hot, fresh tax tips will still be here at the Gavrilov & Co Blog. So in this blog, you’ll find a tasting menu of restaurant taxes and issues. They will be demystified, simplified and clarified.
Boston-based RSM Tax Partner Matt Talcoff says, “With the right planning, operators can take advantage of key provisions of the Tax Cuts and Jobs Act” (TCJA.) He explains a tax issue that has caused quite a few restaurant owners in sort of an identity crisis. They wonder what type of tax entity they are, or what type they should become.
Fresh Hot Tax Tip 1–Restaurant Taxes: Clues to the Entity Mystery
It’s no surprise that the TCJA reduced the tax rate for C corporations to 21 percent for tax years starting after Dec. 31, 2017.
- That is a major tax reduction in case you did not know it. That is, in fact, down from 35 percent.
- Suddenly, a rash of restaurants want to convert or begin business as a C Corporation, even if they do not quite know what it means.
Gavrilov & Co joins experts like Matt Talcof, National Tax Industry Leader with RSM, by recommending restaurateurs stop, look and listen. Before deciding you want to transform your business into a C Corporation, you will need to reflect on at least two major questions:
1. How do the provisions of the tax laws work?
2. What is your five-year plan? Or at least you should consider your business and personal long term goals. Be sure you know how this business structure works. You combine your money with other shareholders. In turn, you get stock in the restaurant business.
3. The Internal Revenue Service views this type of business as a completely separate tax entity. Thus, the business dictionary states“your business can take tax deductions just as an individual would.”
4. However, Let’s Think Again: This also means the IRS can tax your business twice. First, you must pay at the corporate income tax level. Then you must pay again when the corporation “pays you via salary, bonuses, or dividends.”
Meet The Alternative Business Structure and Situation
Alternatively, you could structure your restaurant business as a sole proprietorship or a pass-through entity. You see, an “S corporation, LLC or partnership currently pays taxes on business income at individual rates.” Once.
Restaurant Taxes: Look Before You Leap
Let’s not leap into a C Corporation until we demystify another layer of the TCJA. There is another, slightly less publicized provision in the TCJA. It could permit you to deduct 20 percent of your qualifying business income before you calculate your federal tax bill
Do the math: Pay the taxes at the new 37 percent individual rate. Plus you take the deduction business income. The new pass-through deduction could effectively push your federal tax rate to about 29.6 percent. When you look at this alternative, you might decide the complexities of the C Corporation are not worth the money it might save.
Reflecting on Restaurant Taxes and Your Life Plan
Let’s say you plan to make your restaurant your life’s work. Your son and your youngest daughter also commit to your dream. The restaurant will be your legacy and their dynasty. It will be a generational, family-based enterprise. In this case, experts say the C Corporation makes perfect sense. You’ll have cash flow savings for running the restaurant.
However, if you are perceiving the restaurant business as a financial stepping stone to other enterprises, that’s a different matter. If you’re watching out for a perfect strategic buyer within the next 3 years, we want you to realize the C Corporation structure could set you up for a complex double tax situation.
Restaurant Taxes: Fresh Hot Tax Tip 2– Capital Spending: (Restaurant Owners among our Clients are Loving this One)
There is no doubt about it, your restaurant will require lots of equipment. Those cute chairs, those grand leather booths, that walk-in freezer. When you buy the big stuff, like your kitchen equipment, the TCJA has a bonus for you. It’s a bonus depreciation provision and it allows you to immediately write off 100 percent of the cost of equipment.
The used or new equipment will qualify, as long as you bought it after Sept. 27, 2017.
One Cautionary Note: Talk to your tax professional because some states will work under the old rules. Only your tax professional knows for sure.
Here at Gavrilov & Co, we’ll look at your individual tax situation and assist you in choosing the right way to deduct your asset purchases. “You may find you’re better off balancing expensing between the bonus-depreciation provision and the Internal Revenue Code’s Section 179 expensing, which also expands under the TCJA.”
A little visit to the IRS online resource reveals, “Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service.” They add, “For tax years beginning after 2017, the TCJA increased the maximum Section 179 expense deduction from $500,000 to $1 million.”
Plus, we discover that the “phase-out limit increased from $2 million to $2.5 million.” By the way, the IRS wants you to know these amounts are indexed for inflation for tax years beginning after 2018.”
Tax Credits and Deductions Demystified for Restaurants: Delicious Advantages
You might have heard about the fresh, hot tax credits carefully conserved by the TCJA. Let’s take a quick look.
- One that bears mentioning is the Work Opportunity Tax Credit. (WOTC) To put it simply, the IRS gives you tax benefits for hiring and retaining employees who often face difficult barriers to their employment. The J A in TCJA means “Jobs Act,” and this tax credit really deserves the name.
- Likewise, take advantage of the FICA tax reimbursement credit. The IRS gives you this credit if you pay for taxes on tips made by your employees. Tipping is certainly a big tax issue within the restaurant industry. For more information about taxes and tipping, we have previously written blogs. You can find out the details about your part in reporting tips. You can also discover and share the information about your employee’s part of this responsibility.
Taking Advantage of the Tax Deductions for Your Restaurant
In Part Two of our series on Restaurant Taxes Demystified, next week, we intend to bring you some details about each of these major tax deductions for your Restaurant. Below is a little menu that gives you only a taste of each tax deduction. Next week we will be bringing you the entree portions of information on each deduction.
Labor: A big deduction for you. It includes the wages for your splendid staff of managers, waiters, cooks/chefs, bartenders, dishwashers, and more.
Food Costs: Over one-third of your annual budget goes for food, of course. Did you know foodstuffs are not treated by the IRS as inventory?
Operating Costs: Here’s where we deduct of rent, utilities, office supplies, like any small business.
Smallware: You’ll find a ton of small deductions here. From flatware to small appliances, we will cover your entire list next week.
Advertising: Of course, this category of deduction includes print, radio, TV, and website advertising. Did you know there’s no dollar limit on this deduction?
Menus: designing and printing menus is an ordinary and necessary business expense
Capital Improvements: Usually, the cost of capital improvements for commercial property is recovered through depreciation over 39 or 15 years. We have some fresh details on this point for you.
Thank for reading the Gavrilov & Co blog this week, and we hope you enjoy a fabulous NYC Valentine dinner, whether you go to a restaurant or cook it quietly at home.