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Year-End Tax Planning: 10 Ideas for the Restaurant Owner/Operator

Posted 5:35 AM by

As a restaurant owner/operator, you work hard to generate a profit each and every year. Unfortunately, as profits grow so does your potential tax liability. While a profitable operation will always incur tax at some level, year-end tax planning is an effective way to minimize your total tax bill.  

Below you will find 10 strategies for minimizing your 2013 year tax liability:   

  1. Impact of changing depreciation rules: There are several depreciation incentives set to expire on Dec. 31, 2013. Most notable is the loss of bonus depreciation (50% bonus) for certain capital purchases made after Jan. 1, 2014, If you are planning a capital purchase for the first quarter of 2014, you may want to explore the tax benefit of moving the purchase to December 2013 to secure bonus depreciation. Note: It is possible that some or all of these incentives will be extended.
  2. FICA Tip Credit: If your wait staff receives tips and you have not taken advantage of the FICA Tip Credit, you should consider an analysis of the potential impact of this credit in the current tax year. The credit is equal to the employer paid FICA taxes on income above the federal minimum hourly wage and could result in thousands of dollars in tax savings.
  3. Accelerate prepaid expenses: As you approach the end of 2013, you may have the opportunity to pull forward some expenses from the first quarter of 2014. If paid in December 2013, these expenses can then be deducted on your 2013 tax return, therefore reducing your current year tax liability. Potential prepaid expenses include state income tax estimates and insurance payments. Note: A current and future cash flow analysis should be included in this decision process.
  4. Elect the Smallwares Accounting Method: If in prior years the business has chosen to depreciate items in the smallwares category, an accounting method change can be made by submitting Form 3115 to the IRS. The Smallwares Accounting Method allows a restaurant to expense the cost of replacement smallwares in the year the items are consumed and used in the taxpayers business. Smallwares consists of items in the following categories: glassware, flatware, dinnerware, pots and pans, table top items, bar supplies, food preparation utensils and tools, storage supplies, service items and small appliances costing $500 or less. Note: The Smallwares Accounting Method is not available for smallwares purchase as part of a start-up package. These costs are subject to the depreciation rules for start-up cost.
  5. Work Opportunity Tax Credit (WOTC): If you employ any individuals from the following target groups, you may qualify for a WOTC.  
  • Qualified recipients of Temporary Assistance to Needy Families (TANF)
  • Qualified veterans receiving Food Stamps or qualified veterans with a service connected disability who: (a) have a hiring date which is not more than one year after having been discharged or released from active duty, OR (b) have aggregate periods of unemployment during the one-year period ending on the hiring date that equal or exceed six months
  • Ex-felons hired no later than one year after conviction or release from prison
  • Designated Community Resident – an individual who has attained ages 18 but not 40 on the hiring date who reside in an Empowerment Zone, Renewal Community or Rural Renewal County
  • Vocational rehabilitation referrals, including Ticket Holders with an individual work plan developed and implemented by an Employment Network
  • Qualified summer youth ages 16 through 17 who reside in an Empowerment Zone, Enterprise Community or Renewal Community
  • Qualified Food Stamp recipients ages 18 but not 40 on the hiring date
  • Qualified recipients of Supplemental Security Income (SSI)
  • Long-term family assistance recipients

The maximum credit ranges from $1,200 to $9,600 depending on the employee hired. A review of your 2013 workforce is recommended to evaluate the potential impact of the WOTC.

  1. Minimize suspended losses in real estate activities: If you hold real estate in a separate entity from your day-to-day restaurant operations, you should consider conducting a review of the projected year-end profitability of each entity (including all depreciation). Passive losses from real estate activities are subject to additional deduction limitations and may not be available to offset taxable income from regular business activities. There may be an opportunity to minimize the combined taxable income from the real estate entity and operations entity, but any such opportunity must be addressed before year end.
  2. Establish a retirement plan or maximize the contribution into current plan: Retirement plans allow business owners to defer tax on current year profits if they are deposited into a qualified retirement plan. There are several plan designs to choose from. The key factors in choosing the best plan design typically include cost, contribution limits for key employees/owners and current year tax savings. Consider having an annual review of the potential tax implications of making or not making a contribution to a qualified retirement plan.
  3. Property tax assessment: The property taxes paid on your equipment and buildings are based on assessed values. Consider conducting an annual review of the assessed values to ensure that you are not overpaying on your property taxes.
  4. Review investment transactions for losses and/or gains:  As you approach year end, create an estimate of the net gain or loss for the current year’s capital transactions. Next, you will want to review your current investment holdings to see if there are any unrealized gains or losses that could be used to offset the gain/loss from the capital transactions executed earlier in the current year.
  5. Manage charitable contributions: If you plan to make charitable contributions in the first few months of 2014, consider evaluating the impact of pulling these contributions into December 2013. It should be noted that the deduction of cash contributions is limited to 50%. Note:  A current and future cash flow analysis should be included in this decision process.

As tax credits, the WOTC and the FICA Tip Credit are taken (dollar for dollar) directly against your tax liability.    

This is not a comprehensive list of tax deductions or credits. The facts surrounding each business will vary; consequently, be sure to review your particular business details with a tax advisor.

About the Author
Jim White is a member of Katz, Sapper & Miller’s Restaurant Services Group. Jim guides restaurant owner-operators through tax compliance issues and helps them plan strategies to minimize tax liabilities and maximize savings. Connect with him on LinkedIn.

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