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 email@example.com.
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.
2015 Tax Savings Strategies for Restaurants and Hotels
With 2015 complete, many restaurant and hotel owners should start thinking about preparing their upcoming tax returns. As a restaurant or hotel owner, there are multiple items to consider in order to reduce tax liabilities.
Depreciation on Fixed Asset or Leasehold Improvement Additions
Restaurant and hotel owners can claim substantial tax deductions on fixed assets that were placed into service in 2015. Under Internal Revenue Code Section 179, a 100% deduction can be claimed for up to $500,000 of equipment, point of sale systems, furniture, and fixtures that were placed in service last year. However, a depreciation stemming from Section 179, cannot be used to create a business loss for the restaurant or hotel.
An alternative to Section 179 depreciation is to claim a 50% bonus depreciation deduction on brand new fixed assets that were placed in service. A 50% bonus depreciation enables business owners to deduct 50% of the fixed asset’s cost; regardless, of whether the restaurant or hotel is profitable.
If a restaurant or hotel owner is leasing their space from a property owner, up to $250,000 of Section 179 depreciation or an unlimited amount of 50% bonus deprecation can be claimed on “qualified leasehold improvements” that are placed into service. A “qualified leasehold improvement” is any improvement that is:
• Made to an interior portion of the building
• Made to nonresident property
• Pursuant to a lease
• Made to a building that’s been in service more than three years
FICA Tip Credit
Restaurant owners can claim a tax credit if gratuities earned by their tipped employees are reported on their W-2 forms, and the employer withholds and pays their share of the Social Security and Medicare taxes. Social Security is equal to 6.2% of an employee’s compensation while Medicare is equal to 1.45%. The tax credit the restaurant owner would obtain is equal to the employer’s portion of the Social Security and Medicare taxes.
If tipped employees are paid less than the minimum wage, which is deemed $5.15 per hour for the “FICA Tip Credit,” any employer taxes paid on the portion of the tips that assists in getting an employee to the $5.15 minimum wage are ineligible for the tax credit.
It’s not uncommon for restaurants and hotels to pay their managers a year-end bonus contingent on the business’s performance. Restaurant and hotel owners that use the accrual basis of accounting can take a tax deduction by accruing 2015 performance-based bonuses to their managers. Any accrued bonuses must be paid before March 15, 2016, in order to claim the tax deduction.
Accrued Vacation or Sick Leave
Restaurant and hotel owners that use the accrual basis of accounting can take a tax deduction for any unused vacation or sick leave that is either used or paid out to employees before March 15, 2016.
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 firstname.lastname@example.org for more information.
Processing fees that are incurred by restaurant owners when a customer dines in and pays by credit card can get expensive and eat at a restaurant’s bottom line. The processing fees are based upon what customer pays on the both the food and beverage bills, as well any gratuity that is left for the server. Savvy restaurant owners, however, may have the opportunity to offset the portion of the credit card fees that is attributable to the servers’ tips.
Under the Fair Labor Standards Act (FLSA), when tips are charged on a credit card and the employer has to pay a credit card company a percentage on each sale, the employer has the option to pay the employees the tip less the percentage that was paid to the credit card company. Reducing the employee’s tips by the allocated portion of the credit card fee cannot reduce the employee’s wage below the required minimum wage.
A customer dines in a restaurant and the total bill is $100 before considering gratuity. The customer pays the bill on their credit card plus a $20 gratuity; a total of $120 is charged to the credit card. The credit company charges a 3% fee on all transactions to the restaurant, which would equal $3.60 for this specific transaction. Of the $3.60 credit card charge, $3 is for the bill (3% of $100) and $0.60 is for the tip (3% of $20). The employer could legally provide the employee $19.40, representing the $20 tip that was earned minus $0.60 for the employee’s pro-rated portion of the credit card charge.
While the FLSA states that an employer can reduce a server’s tips by a portion of the credit card fees, employers should proceed with caution depending upon the state where they are operating their restaurant. For example, the District of Columbia, Maryland, and Virginia do not specifically address whether an employer is or is not entitled to shift a portion of the credit card liability to the employee.
In other states across the county, there are varying provisions. The New York State Department of Labor specifically states that an employer is not required to pay the employee’s pro-rated share of the service charge and can deduct a pro-rated portion of the credit card fee from the employee’s tips. There are also states such as California and Massachusetts where the law requires the employer to pay all costs of doing business and not pass any costs such as credit card fees on to the employees.
Aronson LLC is available for consultation on year-end tax planning and business management topics for restaurants. Please contact Aaron M. Boker, CPA at 240.364.2582 or email@example.com for more information.