Restaurant owners can take advantage of many special deductions and credits providing substantial tax savings. Here are several to explore:
Tax Credits for Hiring in Empowerment Zones. Tax credits are available for hiring employees who live and work in an Empowerment Zone, an area in need of economic revitalization as determined by the US Department of Housing and Urban Development. Eligible employees must be employed for 90 days before an employer may credit up to 20% of the first $15,000 paid to the employee (i.e. $3,000) per year. There is no limit to the number of eligible employees for whom an employer can claim credit. This temporary program that has been extended until December 31, 2016, but credits are renewable each year pending IRS approval.
Full Purchase-Price Deduction on Qualifying Equipment. Section 179 of the Tax Code permits businesses to deduct from gross income the full purchase price of new and used qualifying equipment and off-the-shelf software. The deduction limit for 2016 is $500,000.
Depreciation. In recognition of the extensive usage restaurant equipment sees compared to most equipment, qualifying leasehold improvements and qualifying restaurant equipment are eligible for shorter 15-year depreciation periods instead of the standard 39-year scale. For 2015 to 2017, moreover, a bonus depreciation permits a business owner to take an additional 50% deduction on the cost of qualifying new property for the year it entered into service. This bonus amount decreases to 40% for years 2018-2019.
Tenant Improvement Allowances. Section 110 of the Tax Code permits certain tenants of retail space to exclude from income landlord allowances used to construct or improve leased real property for the tenant’s benefit. This exclusion applies only to short-term leases (15 years or less) for non-residential real property. A lease or separate agreement executed as a provision of the lease must specifically state that the allowance must be applied toward construction on, or improvement to, qualified long-term real property used in the tenant’s trade or business.
Restaurant Remodel/Refresh Safe Harbor. This safe harbor permits most restaurants and retailers to deduct 75% of qualifying remodel or refresh costs, requiring them to capitalize only 25% of the remodel or refresh. These costs must be incurred in connection with qualifying activities in a qualified building primarily used for retail and food and beverage sales. The safe harbor eliminates the computation and analysis of which costs should be expensed, capitalized and/or depreciated.
Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (FICA Tip Credit). Restaurant owners may recover a portion of Social Security and Medicare taxes paid on income from employee tips. To receive the credit, employees must accumulate tips from customers by providing, delivering or servicing food or beverages and the employer must have paid or incurred employer Social Security and Medicare taxes on these tips. There is no credit for tips that help employees meet the federal minimum wage.
Employer-Provided Food. Restaurant owners may deduct the value of meals furnished by the employer to an employee and his or her spouse and dependents for the convenience of the employer. To qualify for this deduction, the IRS requires the meals be necessary for the employee to perform his or her duties. Generally, “convenience of the employer” means the employee must remain on the premises in case of emergency or if allocated breaks are too short for the employee to reasonably get food elsewhere.
If you have any further questions about what deductions and tax credits your restaurant business may be eligible for, contact your CPA or Marcus & Boxerman at (312) 216-2720 or info@marcusboxerman.com.