Restaurants have several major tax incentives available to them, yet most are not taking advantage and consequently losing money. The main programs that most in this industry are missing out on are:
- Engineering-based Property Cost Allocation
- Property Tax Reduction
- WOTC Hiring Incentives (tax credits)
- ERC Tax Credits
Engineering-based Cost Allocation
Bars and restaurants have been hit hard by the COVID-19 pandemic – if not closed for business, most are operating in a limited capacity with cuts to hours, menus, number of patrons. The federal CARES Act of 2020 has made the depreciation rules more favorable by creating possible tax savings for bars and restaurants that may help these businesses during these uncertain times.
Engineering-based cost allocation identifies opportunities for federal, and in some cases, state tax advantages to owners of commercial industrial real estate by accelerating the depreciation on their property.
Taxpayers are typically correct in depreciating personal property such as equipment and furniture over five or seven years, but they often neglect available federal and state tax benefits by erroneously depreciating their entire investment in constructing or acquiring a building over 39 years. To do this correctly, one must hire an experienced engineer with a thorough understanding of construction finance. The engineer will review all blueprints, architectural drawings, and electrical plans to isolate structural and mechanical components from those that are considered personal property in addition to identifying architectural and engineering fees that can be segregated. The resulting cost allocation report will allow a taxpayer to:
- Adjust the timing of deductions thus maximizing tax savings
- Create a complete audit trail to resolve any IRS inquiries
- Capture immediate retroactive savings on qualifying properties
- Reduce real estate tax liabilities significantly
The National Restaurant Association mounted a wide scale campaign to inform Congress of the importance to provide tax certainty to restaurateurs.
Simply put this provision allows a taxpayer to allocate the costs of an asset over the period in which they are used. The 15-year Depreciation provision allows leasehold improvements, restaurant improvements and new restaurant construction, and retail improvements to be depreciated over 15 years rather than the standard 39-year recovery period that would normally apply to nonresidential real property.
Due to the nature of the industry restaurant buildings experience daily wear and tear that many industries do not. As a result of this increased wear and tear, most restaurants remodel or update their buildings every six to eight years. Thus, the 15 year provision more accurately fits the recovery timeframe.
Benefits of the 15-year Depreciation provision:
- Reduces cost of capital expenditures
- Increases cash flow
- Allows hiring more employees
- Allows capital expenditures to expand business
- Reinvestment in construction & renovations positively affects the economy
Property Tax Reduction
Probably the most frustrating bill that comes each year (or in some cases, twice each year) is the property tax bill. As of this writing, our studies indicate the average Restaurant in the United States is being overcharged by 10% on their property taxes. There are many reasons Restaurants are overcharged but mainly it is the result of improper assessments by the municipality. If you own a Restaurant and are paying property taxes over $50,000 per year, you should have a review completed on your facility. Reductions in this area are direct to your bottom line!
If you have not had a thorough review on your facility, especially as it relates to the areas of Property Cost Allocation, and Property Tax Reduction, you are likely losing money that should remain in your pocket.
Worker Opportunity Tax Credit
This tax credit is made available to employers who hire individuals from several targeted groups facing significant barriers to employment.
Examples of WOTC-target groups:
- Disconnected Youth
- Family Members receiving TANF
- TANF recipients
- SNAP (food stamp) recipients
- Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties)
- Vocational Rehabilitation Referrals
- Supplemental Security Income Recipients
- Summer Youth Employees (living in Empowerment Zones)
Currently the restaurant industry employees over 13 million people nationwide. Many of these individuals were hired specifically due to the WOTC act being in place. The WOTC provision allows workers who may not have been able to, move into self-sufficiency by earning a steady income and becoming contributing taxpayers.
Hiring from the group of qualified job seekers via the WOTC provision can mean direct federal tax savings to your business ranging from $1,200 to $9,000 per qualifying employee. Restaurants tend to experience better than average qualification rates in state and federal hiring credit programs. Hundreds of thousands of dollars are provided via this provision annually.
The most notable two programs in addition to WOTC are Section 41 R&D Tax Credit, and the Startup Tax Credits. You may be thinking; "How does R&D and the Startup Tax Credits apply to my business?" If you own a brewery, you likely qualify for these additional tax credits as well!
Employee Retention Tax Credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created a new employee retention tax credit for employers who closed, partially or fully, and experienced significant revenue losses as a result of COVID-19.
Who Is Eligible:
Private employers, including non-profits, carrying on a trade or business in 2020 or 2021 that:
- Have operations partially or fully suspended as a result of orders from a governmental authority due to COVID-19, or
- Experience a decline in gross receipts by more than 20% in any one quarter compared to the same quarter in 2019
How Much Is The Tax Credit for 2020?
C-ERC is a 70% tax credit for the first $10,000 of earnings paid each quarter between January 1, 2021 and June 30, 2021 per eligible employee. This amount can include the employer portion of health benefits. Basically, for every eligible employee who earned $20,000 or more during this time period would provide the employer with a $14,000 tax credit.
How Is The Credit Taken?
The COVID ERC is applied against the employer portion of payroll taxes.
Can PPP and ERC be taken by the same employer?
As of December 21, 2020 and the passing of the Consolidated Appropriations Act of 2021, employers can take both PPP and ERC. Congress will allow employers to claim both, but not for the same dollars of payroll costs. They can be stacked for the highest benefit to the client.
The Financial Meltdown in the mid 2000's brought about a renewed focus on Job Creation. With this we saw massive expansion of Federal Tax Incentives for creating, and maintaining jobs. This was done through the Small Business Jobs Act, The American Recovery and Reinvestment Act, Numerous Job Creation and Protection Acts, and most notable the PATH Act signed by President Obama for effective changes in 2016 through 2022.
The pattern in the last decade is that with the passing of each Act, more and more companies are eligible for Employee based Tax Incentives that broaden not only WOTC itself, but hundreds of programs that surround it.
Virtually any business can now benefit from Employer Based Tax Incentives because even candidates that don't qualify for WOTC often qualify for other tax incentives.
We work with our clients in every industry to help them capture these important specialized tax incentives and expense reductions AND we do this at NO-RISK to them. We use our money to identify, capture and verify these savings before ever invoicing the client. Give us a call to see if you qualify or visit our "Six Tax Credits in 60 Seconds!" website!