By Tommy Lee, partner-in-charge of Retail, Franchise and Hospitality at Aprio, and Jessica Hussain, tax senior manager at Aprio
As a restaurateur, every dollar saved on your taxes is another dollar that can be reinvested into developing new menu items, hiring new employees, opening new locations and more. Accelerated depreciation and several available income tax credits can substantially reduce your income tax liabilities this coming tax season. These provisions are unfortunately frequently overlooked, so here is a quick reminder of the ways these provisions could save you money.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended bonus depreciation through 2019, permanently set the Section 179 expensing limit at $500,000 and introduced qualified improvement property (QIP).
The introduction of QIP gives business owners an additional opportunity to claim bonus depreciation on qualified improvements that do not have to be made pursuant to a lease and do not have to be made to a building more than three years old. The depreciable life for QIP is 39 years.
The bonus depreciation rules are generally the same as before the PATH act, but the bonus depreciation rates have changed:
2016-2017: 50 percent
2018: 40 percent
2019: 30 percent
The PATH Act also made permanent qualified leasehold improvements, qualified retail improvements and qualified restaurant property.
The Section 179 depreciation expensing limit has been permanently set at $500,000, with a $2 million overall spending limitation before phase out of the deduction. The PATH act also removed the restriction that qualified real property is limited to a $250,000 deduction out of the maximum $500,000.
When reviewing your asset purchases to determine which should be capitalized and subject to depreciation, remember that the IRS increased the deductible amount for purchases of tangible property by business owners who do not have applicable financial statements from $500 to $2,500 per item starting in 2016.
Accelerated depreciation can generate substantial deductions, which results in lower taxable income, if you qualify to make these elections. Improvement and equipment purchases should be analyzed carefully to ensure you are utilizing the most beneficial depreciation methods.
Federal Tax Credits
Federal tax credits can be used to offset your income tax and keep more of your money in your business. Here are a few of the credits available to restaurant owners:
- FICA Tip Credit – Employers are eligible to receive a 7.65 percent credit for the social security tax paid on employees’ tips received from customers in connection with food or beverage sales. The credit is calculated on tip income in excess of a $5.15 per hour minimum wage and can be utilized to offset federal income tax. If you have tipped employees in your restaurant, you should be utilizing this credit.
- Work Opportunity Tax Credit (WOTC) – Employers who hire employees from a targeted group can claim a WOTC against federal income tax. The credit is only available for individuals who begins work before Dec. 31, 2019. There are currently 10 targeted groups of employees that can qualify for the credit. The most recently added group is the long-term unemployed. The credit ranges from $1,200 to $9,600 and depends on the target group, wages paid to the employee and the number of hours worked in the first year of employment.
- Empowerment Zone Employment Credit – An employer who pays wages to a qualified zone employee within a distressed urban or rural area could be eligible for a tax credit of 20 percent of the first $15,000 of wages in 2016. A qualified zone employee is one who lives in and performs substantially all of his or her service within an empowerment zone. A list of current urban and rural empowerment zones can be located by using the EZ/RC Address locator at www.hud.gov/crlocator
At Aprio, we have a team dedicated to the business, accounting and tax issues surrounding the Retail, Franchise and Hospitality sector. If you have any comments or questions about preparing for the 2016 tax season, please contact us at firstname.lastname@example.org or email@example.com