We spoke with two tax experts recently to help restaurateurs understand what they need to know going into tax season. Gregory Porcaro is a principal in charge of tax, business valuation, and business consulting services for Otrando, Porcaro & Associates, Ltd. Ian Boccaccio is a principal and international income tax practice leader at Ryan LLC.
What impact will Trump’s 2018 Tax Plan have on restaurants?
Some economists are saying that the Trump administration’s tax plan will have “disastrous consequences.” If so, just how much impact will the plan have on restaurants specifically?
I’m not an economist, but I believe, in the short run, this will provide some boost in the economy that could help restaurants. The National Restaurant Association’s November 2017 industry update indicated that restaurant owners were optimistic about business in 2018 and I don’t think tax reform will hurt.
Are there any immediate steps that restaurant owners should be taking now to prepare for the plan?
The vast majority of tax provisions impact 2018 so the real focus is on 2018. Restaurant owners should focus on capital investments and overall operating profit (probably what they would normally do), but there are several changes that could reduce their 2018 tax liability and related estimates, if applicable.
Are there any reasons that the restaurant industry should be hopeful about this new tax plan?
Yes, it does not reduce the FICA tip credit. Restaurant owners get a tax credit based on the amount of Social Security taxes on wages paid to tipped employees that exceed the 2007 federal minimum wage ($5.15/hour). The House bill wanted to increase the minimum wage base to the current minimum wage ($7.25/hour). This would have translated in a reduction in the credit of approximately $320 per full-time equivalent employee thereby increasing the cost of labor, which is a critical component of a restaurant’s overall operating costs.
It also does not reduce the Work Opportunity Tax Credit, or WOTC. Finding good employees is a challenge for all businesses, but, in my experience, it is particularly difficult for restaurant owners due to the diverse types of skill that are necessary in each aspect of the business from the front of the house to the back of the house. The WOTC provides a strong tax incentive ($2,400 – $9,600) to hire individuals who may have a difficult time getting back in the workforce – such as veterans, welfare recipients, long-term unemployed, ex-felons and others. It is a complex credit to utilize but for my client that can utilize it. It helps reduce labor cost and provide opportunity for employment in their community.
The 50 percent business meals deduction was left intact. This was critical because, according to some info I have read, 8-10 percent of restaurant industry sales are attributed to business meals. Tax law still allows a tax deduction for 50 percent of qualified business meals. if tax reform eliminated this deduction (like it did for entertainment expenses) I am sure it would have impacted how businesses decide how much they will spend on this type of expense.
Six benefits to restaurants of the tax plan:
- 20 percent deduction for qualified business income from a pass-through entity
- C corporation rate reduction to 21 percent
- Accelerating deductions for many types of equipment/capital additions
- Reduction in estate taxes – $11.2M exemption per person
- Repatriation of offshore cash
- Increase in consumer disposable income
“Restaurant owners should focus on capital investments and overall operating profit, but there are several changes that could reduce their 2018 tax liability and related estimates.” – Gregory Porcaro of Otrando, Porcaro & Associates, Ltd.
Now let’s review other provisions of the plan that restaurant owners need to be aware of:
- The new excess business loss limitation – particularly for brand new locations. This law limits the amount of loss that a taxpayer can use up to $250K in overall business losses ($500K, Married Filing Jointly). The unused loss is carried forward to subsequent years.
- The reduction in the use of net operating losses. For 2018 and beyond, the max NOL that can be used per year is limited to 80 percent of the total, with an indefinite carry forward.
- Business interest deduction limited for restaurant operations with revenue over $25M (in the aggregate). The amount of interest that can be deducted in a given year will be limited to 30 percent of income before interest, depreciation and the new 20 percent deduction. Any excess is carried forward.
- “Business entertainment” expenses are no longer deductible. To the extent there is a connection with business entertainment and business meals, the loss of this deduction could adversely affect business spending on meals.
- For operations that offer family medical leave, there is now a 12.5 percent tax credit based on the wages paid during leave for 2018 and 2019. This credit was intended to provide an incentive for employers who are not required to offer paid family leave and reduce the cost for those that are, but I think since the credit is scheduled to only last two years, it will not motivate smaller employers to offer this fringe benefit to its employees.
If you had one piece of advice to restaurant owners for how to prepare for the coming tax changes, what would it be?
Review the impact of the 20 percent pass-through tax deduction with your CPA. This is can be very beneficial when projecting your 2018 tax liability, but it is very complicated.
Tax Deductions for your Restaurant
Be sure to talk to your accountant about some of these overlooked deductions to see if you qualify.
One of the largest expenses in your restaurant, food expenses are deductible. Be sure to track your inventory closely so you can also account for spoiled or stale food that had to be thrown out.
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Another of your most significant costs, this includes all expenses associated with all the people you employee, but not the profit that the owner makes. Be sure to include expenses associated with any benefits that you offer as well as payroll taxes that you’ve paid.
These include the daily expenses involved in running your restaurant, from office supplies to menu printing or linen services. Lots of little items in this category, but tracking them all is worth the time.
Advertising and Marketing Expenses
This includes all the traditional advertising services that you’ve used. Ads put in local newspapers, Facebook ads, and any people you may have worked with such as a marketing consultant or graphic designer.
This includes bigger items that you may have purchased throughout the year, such as new kitchen equipment, tables for the dining room or improvements made to the restaurant itself. Check to see which of these assets can be depreciated over more than just this year, or expensed for the current year.
Most restauranteurs are still working even when they’re not physically at the restaurant. If you’re using your personal vehicle to pick up supplies, make deliveries or get back and forth from a catering gig, these miles are deductible. Set yourself up with a tracking system so that you can maximize this deduction.
Loan Interest Expenses
If you took out a loan this year to make investments in your business, the interest you paid on that loan should be deductible.
Work Opportunity Tax Credit
The federal government offers this tax credit to employers that hire people from certain target groups, such as veterans that meet certain qualifications. Check to see if any of your new hires make you eligible for this tax credit.
Should Restaurants Hire a Tax Accountant?
Michael Aniceto is a CPA with Heald Hoffmeister and Company, Inc. in Needham, Massachusetts for almost ten years and is a tax resource for About.com. We asked him about the benefits of paying an accountant vs doing it ourself.
Q: What are the benefits of hiring an accountant instead of using online software like TurboTax?
MA: A CPA will provide personalized support, while a TurboTax is a one size fits all support. A CPA will be able to look at the whole picture and figure out the best alternatives for certain tax positions (ie depreciation, rental properties, pass-through entities, inventory). A CPA can also explain all tax positions and provide necessary planning for future tax events.
Q: Hiring a CPA is more costly, but what are the long-term benefits of hiring a CPA instead of using software like TurboTax?
MA: A CPA will do his or her due diligence to make sure your tax return is properly filed. So if or when the IRS pulls your tax return for an audit, you will have the reassurance that your return is properly filed. Also a CPA should be able to provide you with future tax planning continuously throughout the year, which is especially important for small business owners. CPAs will also be able to provide financial statement preparation. Many banks ask small businesses to provide some sort of reassurance by a CPA regarding their financial status.
Q: At what point should a small business switch from online software to a professional CPA?
MA: Revenue is not the major factor, but the complexity of the business. A CPA should be used at the inception of the business. A CPA will be able to provide insight on what type of entity to start, how to setup the internal accounting software, and how to setup internal controls. A CPA can prepare your payroll and report your payroll taxes. A CPA is always available for business advice or consulting depending on what the goals of the business are.
Surely it’s tempting to pay $149 to file federal taxes and $49 to file state states for small business through TurboTax. Unfortunately, doing your own small business taxes, even with the help of self-guided software, can be like visiting a foreign country without an interpreter.
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