Opening a new restaurant can be an exciting business venture. However, with it can come a great deal of stress and a high risk of failure. To avoid the clichéd trap of restaurants failing within several years, prospective restaurant owners should develop a thorough business plan and ask themselves these important questions:
Consider what type of food or beverage items your restaurant will serve to customers. What is the demographic of your target market? What type of atmosphere will you create for customers?
As the owner, you must decide the right entity structure for your restaurant based upon a variety of factors. Will your restaurant be legally organized as a Limited Liability Company (LLC), S-Corporation, or C-Corporation? Before making the decision, you will need to consider the number of co-owners you will have, whether the restaurant be funded through debt or private equity, how you plan to compensate yourself, how you will pay your partners or outside investors, and what would make the most sense for you from a tax perspective. Consulting with an experienced accounting advisor can help you make the right choice.
If you are going to have co-owners, there are certain considerations that should be made when drafting the initial operating or shareholder agreement. What role will each owner have in the restaurant? How will the profits be divided? How will everyone be compensated for their services? What will happen in the event one owner chooses to sell their share of the restaurant?
It’s the running joke of business: location, location, location! As corny as it may sound, there’s a reason it’s such a common refrain. Location is vital. Your restaurant should be in a space where it can generate a high volume of traffic from your target market.
You need to estimate how much it will cost to furnish the new restaurant, obtain a liquor license, and buy the initial set of china, linens, silverware, etc. There should also be enough working capital set aside to cover business expenses for the first few months should the restaurant’s traffic be initially slow.
Banks and other financiers need to know that the restaurant will have enough cash flow from daily operations to repay any loans you are seeking. Most investors will want to see a strategic business plan for the restaurant to ease any concerns that they may have. It’s not uncommon for the bank to request the restaurant owner, especially for a start-up restaurant, to personally guarantee the debt so they can have an alternative should the restaurant be unable to repay the loan.
Even before its official grand opening, it is important for your restaurant to start marketing to the community. Create a variety of marketing tools, including a website, social media, promotional events, coupons, and restaurant specials, to start generating buzz.
A restaurant’s food, or “prime costs,” is the highest and most variable expenditure that it will incur each year. Food costs need to be properly managed to ensure that food made to order is not over-portioned, sitting too long on the shelf, thrown away, or stolen.
The treatment of employee tips has been a problematic area in the restaurant industry for years. It is imperative that tips are handled correctly or your restaurant could face expensive consequences. Tips received by servers must be reported as W-2 compensation. The restaurant is obligated to withhold Social Security and Medicare tax from future compensation and match the FICA withholding.
As a restaurant owner, you will have many responsibilities that will constantly keep you busy. You should consider hiring a manager to supervise the restaurant’s daily operations, such as ensuring the restaurant is selling its menu items and there is an appropriate number of staff assigned each shift.
Business owners with 50 or more full-time equivalent employees must provide health insurance to employees that work an average of 30 or more hours per week. All insurance offered must provide “minimum value coverage,” meaning the employer’s insurance plan must pay out at least 60% of the employee’s incurred medical charges. Businesses that do not offer health insurance to full time employees could face penalties up to $2,000 per employee. Not offering “minimum value coverage” insurance could cost the business fines of $3,000 per employee. As a restaurant owner, you must plan ahead for how you are going to comply with the mandates of the Affordable Care Act.
Aronson LLC is available for consultation on this and other business management topics for restaurants. Please contact Aaron M. Boker, CPA at 240.364.2582 or email@example.com for more information.
In 2014, the IRS issued guidance, which over the last several years has made a significant impact on how hotel, restaurant, and food distribution owners capitalize and depreciate assets placed into service. Effective for tax years beginning January 1, 2014, the tangible property regulations regulate the treatment of normal repairs and maintenance versus an improvement to an asset. The regulations also clarify whether fixed asset additions must be capitalized or expensed immediately.
Wondering how this applies to your business, and if you need to make changes to take advantage of potential savings? Find out below.
What must be implemented?
All taxpayers that have depreciable fixed assets must have a capitalization policy that determines the threshold under which a fixed asset or an improvement to a unit of property is to be capitalized and depreciated. Under the new regulations, the IRS will allow a business without audited financial statements to have a “safe harbor” threshold of $2,500 per unit of property and $5,000 per unit of property for business owners with audited financial statements. While taxpayers are allowed to use higher capitalization thresholds, the taxpayer must be able to justify using a threshold above the allowed safe harbor amount in the event of an audit.
What is considered an “improvement to a unit of property”?
Business owners must make the distinction between routine maintenance and an improvement to a specific asset or unit of property. Improvements to a unit of property that must be capitalized and depreciated over its useful life are defined as betterments, a restoration to an original state, or an adaptation to a new use. Examples of a unit of property can include the building, HVAC system, and electrical system. Common improvements for hotel and restaurant owners could include expanding the hotel building or a restaurant conducting renovations to the inside of the building space used for restaurant operations.
What is considered routine maintenance?
Routine maintenance may be written off if the action will be completed more than once over a ten-year period. This could include hotel owners putting down new asphalt in the hotel’s parking lot every five years or restaurant owners replacing the floor titles of their restaurant every few years.
Can you deduct materials and supplies?
Under the regulations, there is a set de minimis of $200 or a useful life of 12 months or less that can be expensed immediately upon purchase. This allows hotel, restaurant, and food distribution owners to immediately expense items such as bed linens, glassware, tablecloth linens, utensils, and manufacturing supplies.
What are the opportunities under the regulations?
The regulations require great diligence in both year-end tax planning and tax return preparation, but do allow for substantial tax savings techniques for hotel, restaurant, and food distribution owners. Accelerated deductions of asset additions could be obtained under the tangible property regulations. If a unit of property such as a HVAC system or electrical system is placed in service and it replaces an old system, the business owner may be able to write off the old HVAC or electrical system that was replaced.
Each year, business owners should review their fixed asset purchases to determine if there are any additions that can be directly expensed or if there are any prior fixed assets additions that can be disposed of. Please reach out to us if you have any questions or would like more information on the tangible property regulations and the impact it can have for a restaurant, hotel, food distributor, or company that services the hospitality industry.
As President Donald Trump’s administration begins its work, rumors that most or all of the Affordable Care Act (ACA) could be repealed are plentiful. Over the next few months, the future of the law should be known. However, the ACA remains in place for 2017 and employers should move forward accordingly.
Currently in effect under the ACA, business owners with 50 or more employees who are either full-time (FT) or full-time equivalent (FTE) are required to offer health insurance coverage to their FT employees. FTEs are determined by dividing the total hours of all part-time employees worked in one month by 120. Seasonal employees are not included in this calculation.
While the test to determine coverage requirements is based upon calculating the number of both FT and FTE employees, employers are only required to provide health insurance to those employees who work 30 or more hours per week. In order to maintain compliance, health insurance coverage must pass these two tests.
Employers with 50 or more FT and FTE employees, who wait for the new administration’s plans for health insurance, may be underestimating the impact of potential penalties for not offering health insurance to all eligible employees. Employers who fail to offer appropriate coverage could face a penalty of $2,000 per year for each full-time employee, reduced by 30 if one or more FTs receive assistance from a Health Insurance Marketplace offered by the federal or state government.
The ACA is still law despite its uncertain future. Compliance is especially critical for employers in the restaurant, hotel, and manufacturing industries where large workforces are common. Business owners should continually evaluate their FTE employees and the cost to provide health insurance coverage to those eligible against the potential noncompliance penalties.
Look for future posts on how changes to the ACA will affect businesses. For individual questions or more information on how the ACA influences a restaurant, hotel, or companies that serve the hospitality industry, contact Aaron M. Boker at 240.364.2582 or firstname.lastname@example.org.
As business owners will have their 2016 corporate tax returns prepared in the upcoming months, there are several tools that could be used to help reduce corporate or personal tax liabilities. Here are some strategies that could save you money.
Implement and fund a retirement or profit sharing plan
Business owners can claim a tax deduction for contributions to fund retirement and profit sharing plans on behalf of employees or owners for calendar year 2016. Most plans don’t have to be funded until the tax filing deadline to claim the deduction.
Purchase and place fixed assets into service
Assuming the business is generating a profit, up to $500,000 of fixed assets such as computers, equipment, furniture, and fixtures that were purchased and placed into service before the end of the year can be fully depreciated per Internal Revenue Code Section 179. There is also a 50% bonus depreciation incentive available for new fixed asset purchases placed into service. The 50% bonus depreciation has no asset threshold and also includes leasehold improvements, which is any improvement that is:
Pay out accrued bonuses or wages before March 15
Business owners that use the accrual basis of accounting can deduct wages or bonuses that are accrued at year-end as long as they are paid out before March 15. This is an effective tax strategy that can defer the cash burden of paying year-end bonuses by up to 2.5 months, but also pay out additional compensation that rewards performance and can assist in employee retention.
Effective December 1, 2016, business owners must provide overtime pay to salaried employees who earn less than $913 per week or $47,476 per year. This is a substantial increase to the Department of Labor’s Fair Labor Standard Act (FLSA)’s previous salary level of $455 per week or $23,660 annually.
While the FLSA ensures minimum wage and overtime protections for most employees, the employers are exempt from paying overtime to employees who meet all of the following three criteria:
For the first time under the FLSA, employers can use nondiscretionary bonuses and incentive payments such as commissions to satisfy up to 10 percent of the salary level. In order for these payments to qualify, any nondiscretionary or incentive payments must be paid quarterly or on a more frequent basis.
Restaurant and hotel owners generally pay a vast majority of their workforce an hourly wage and therefore would pay their hourly employees overtime regardless. The new rules could result in now paying overtime to restaurant managers and assistant managers, as well as department managers or assistant department managers in a hotel.
Going forward, restaurant and hotel owners will now need to maintain overtime data for their salaried employees as any potential overtime pay would be calculated on a weekly basis.
Aronson LLC is available for consultation on tax and business management topics for restaurants. Please contact Aaron M. Boker, CPA at 240-364-2582 or email@example.com for more information.