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Make Your Tax Planning Less Taxing in 2023

A study of 500 business owners commissioned by Columbus, Ohio-based tax consulting firm, Clarus Solutions, found nearly one in five was unsure if they took the best advantage of tax incentives. Nearly half of those surveyed said they didn't know if their company qualified for a number of credits and deductions.

Unless you're an accountant, even the mention of tax planning might make you drowsy. However, the money – and headaches – you save by taking greater interest in the process may be well worth the effort.

Year-round tax planning is just one more task piled on many that independent operators confront. It is a rare small business owner who discusses tax strategy throughout the year with their accountant. And not every accountant has restaurant accounting experience.

But the upside of enlisting a restaurant tax expert can pay handsomely. Terracina Maxwell, co-founder of Clarus Solutions, cited a restaurant owner client whom her firm help claim $475,000 in employee retention tax credits.

In this article, Maxwell and restaurant tax expert Anne Gannon, CPA and principal at The Largo Group, share their tips on what restaurant operators can do from now to the end of the year to set themselves up for a successful filing to reduce tax liability and increase after-tax income.

Covid Relief Tax Credits to Claim Before They're Gone

Special tax credits through the Coronavirus Aid, Relief, and Economic Security (CARES) Act "sunset" at the end of the year. Three credits in particular bear special mention for the hospitality industry: Paycheck Protection Program (PPP) loan forgiveness, Employee Retention Credit (ERTC), and bonus depreciation.

If these credits were not taken in the past, they can be claimed retroactively. It's worth noting that in some cases, claiming a credit retroactively means the operator has to amend a past tax return. It's important that operators attend to both tasks, rather than claim a credit retroactively and not go back and amend a return, says Gannon.

As a reminder, the bonus depreciation allowed business owners to take 100-percent depreciation of an item in the year it was purchased, rather than depreciating the item over its lifetime. The bonus depreciation rule also applies to qualified property improvements. Operators who own their building and made qualifying improvements, such as renovating the restaurant interior, can write off the total cost under the special rule.

Qualifying improvements generally include interior improvements rather than exterior ones. They specifically exclude elevators, escalators and building additions. For specific questions about this and other tax planning issues, operators should seek advice from a qualified financial professional.

Operators have until the end of the year to purchase needed items and receive the 100-percent depreciation. Beginning in 2023, the bonus depreciation drops to 80% in the year of purchase, with the rest depreciated over the asset's lifetime. Operators who had a good year may wish to make business purchases now and take advantage of the higher depreciation.

Gannon encourages restaurant operators to make sure they've applied for PPP loan forgiveness through their lender. In order to have a PPP loan forgiven, the borrower must file the forgiveness application with their lender.

Filing for forgiveness allows PPP loans to be excluded from taxable income. On the business books, the loan can be classified as "other income" and not a debt or liability. This is one of those small things that is easy to overlook, but is required for loan forgiveness. If you forget to file for forgiveness, you'll have to repay the money, so it's important not to skip this step.

In addition to PPP loans, some restaurants took out SBA (small business administration) loans to make it through Covid. These loans are not eligible for forgiveness; however, payments were deferred for the last two years. According to Gannon, those payments should be coming due in November or December 2022. "Make sure they're starting to make those payments because the interest there is deductible," she advises.

With the ERTC, operators have three years to go back and amend tax returns to claim credits. Gannon notes that claiming credits is only half of the process. Operators must also amend their returns to reflect the credits they received. "The biggest thing is to make sure they haven't done one without the other," Gannon says, adding that the IRS is sending notices when there are discrepancies in the tax returns due to employee retention credits.

Gannon encourages operators to update their tax preparer on specific credits they have claimed, like the ERTC. The tax preparer can then go back and amend prior-year tax returns if necessary. Maxwell estimates that her company helped one restaurant operator get almost half a million in tax credits with the ERTC. Clearly, this money can add up, and it is important that operators claim credits while they still can.

Beginning the second quarter of 2023, additional credits from tax years 2020 and 2021 will sunset. In other words, employers will no longer be able to claim credits from those periods. The clock is ticking and, moreover, operators are likely to need extra time to gather documentation prior to filing. Some of Maxwell's clients have received letters from the IRS investigating their ERTC claims. Having all the documentation in place helps operators defend their position should the IRS look into a claim.

New Tax Credits That Could Save Your Business Money

In addition to the coronavirus-related tax credits, there are some new tax credits that might impact restaurant operators. In particular, Gannon recommends the "research and development" and "renewable energy" credits.

The research and development tax credits are intended for businesses that are creating new products, which sounds like something not intended for restaurants, particularly existing concepts. Nevertheless, if you just opened a restaurant, you may be eligible for this credit. Gannon finds that breweries and gastropubs are particularly suited for the research and development credit since there is often a heavy research phase involved with developing the perfect brew recipe. Since this tax credit tends to have narrow guidelines for eligibility, Gannon recommends that operators read all the parameters to understand whether they are eligible.

Operators who have installed solar panels on their premises may be eligible for both federal and state renewable energy credits. There are also credits for electric vehicle purchases. Depending on how the purchase is structured – an EV bought as the family car versus one purchased to make business deliveries – these credits may come into play on the individual tax return instead of the business tax return.

Common Tax Credits for Restaurant Operators

Maxwell names two additional tax credits independent operators should have top of mind: the Federal Insurance Contributions Act (FICA) tip credit and work opportunity tax credit (WOTC).

The FICA tip credit affects operators who employ tipped servers who earn above the federal minimum hourly wage or the state's minimum wage, whichever is higher. Operators can receive a tax credit for Social Security and Medicare taxes they paid on eligible employee tips, whether the tips were cash or charged.

There is a formula to gauge the FICA tip credit per eligible employee:

1. Take the total number of the employee's weekly hours and multiply by the sum of the hourly rate, then add reported tips. This represents the total weekly wages.
2. Take the total number of hours worked and multiply by the minimum wage.
3. Multiply the figure in Step 2 by 7.65% which represents the FICA credit.
4. Subtract the figure in Step 3 from the weekly wages to arrive at the weekly FICA tax credit amount.
5. Multiply the figure in Step 4 by 52 (or the number of weeks worked by the individual, if less than 52). The resulting figure is the tax credit you can receive for that employee.

In Maxwell's experience, most operators are aware of the FICA tip credit; however, many operators assume it is someone else's job to track employee tips and hours. She says that operators tend to sign off on tax returns without double-checking their tax preparer's figures. This can backfire when an operator pays more taxes than they need to because it turns out that no one was tracking and reporting the tip credits.

Gannon laments that it's actually a common practice for operators to fail to review the tax return before it is filed – a big mistake, in her opinion. Rather than assume the tax preparer understood everything that happened in the course of a year, she recommends operators conduct their own review to make sure the numbers are correct.

WOTC is a tax credit that rewards employers for hiring certain categories of workers who often struggle to get a job, such as veterans, formerly incarcerated individuals, and individuals who receive SNAP (Supplemental Nutrition Assistance Program) benefits. This tax credit continues to be extended, most recently through December 31, 2025.

The IRS requires a pre-screening notice which must be given to the worker before hiring. There is a separate certification process that must be completed within 28 days of hiring an eligible individual, per the IRS. Operators who have been following the IRS's pre-screening and certification requirements can claim this credit for eligible employees hired within the tax year.

Exactly how much money can an operator expect to receive from WOTC credits? The total varies depending on the worker's classification as one of ten hard-to-hire types and the total number of hours worked, but the maximum WOTC credit is $9,600 for every qualified employee. Maxwell estimates that 15-20 percent of her restaurant clients' workforce qualifies for this credit.

The pre-screening requirements mean operators can't file for WOTC without the proper pre-hire paperwork. If an operator does not have the right paperwork in place, there is nothing they can do about it now. Gan- non recommends operators who missed out on WOTC implement the pre-screening in early 2023. This way, they can claim credits for every qualifying new hire from this point on.

Tax Planning 101

Tax planning starts with knowing your numbers. Get your financial statements up to date if they are not already. "There's less stress when you know ahead of time what the tax return will look like," Gannon says. A long lead time also gives operators who owe more than they anticipated a little extra time to save money.

Gannon encourages operators to review their tax planning on a quarterly basis. This is not an issue, of course, for operators who file quarterly estimated taxes. Making those quarterly payments reduces IRS penalties, helping to keep the money in operators' pockets.

Gannon also recommends that operators meet with their accountants to consider the year to come. Are there big changes on the horizon for 2023 that would impact business income, positively or negatively? If an operator expects more business in 2023 than 2022, they may decide to hold off purchases until 2023, when larger business deductions can offset the increased income. If income is expected to be the same or go down in 2023, then the wiser choice may be to buy now and take the tax write-off when it adds more value.

If it has been a bad year and there is a business loss, the net operating loss (NOL) carryback rule is something to take a look at. "If you lost money this year but you made money in a prior year, you can carry that loss back and amend the prior year return to adjust what you paid in. It's a way to get a refund right away rather than waiting," as Gannon explains. Any operator with a net loss this year and a net gain in a previous year would be eligible.

There is one more important item to tackle before the end of the year: physical inventory. Operators tend to put it off, says Gannon, because employees complain about the labor-intensive process. From a tax planning perspective, physical inventory must be done at the end of the year so the restaurant can start the new year with an accurate count of inventory and equipment.

Gannon reminds operators to discard any broken equipment and spoiled or unused food by the end of the calendar year. Operators should record these losses for write-offs of losses and depreciation. For items not subject to the bonus depreciation (more on this below), depreciation is taken annually. However, if the item was discarded before the end of the year, the depreciation changes to reflect the partial use.

Thinking ahead to tax filing time, Gannon says it's wise to get documents to the tax preparer early. Pass-through and corporation returns are due 3/15, not 4/15, so these operators should get organized in February at the latest.

"You want to make sure your preparer has time to prepare [your return] and you have time to review it," Gannon says. The biggest mistake she sees is not taking the time to review a tax return before it is filed. Tax preparers may not understand everything that happened in the year, and the tax return may not reflect the bottom line when assumptions are made. Gannon strongly encourages operators to review the tax return before it is filed and double-check that the net income listed there is correct.

Find a Restaurant-Friendly Tax Preparer

"There is so much noise about opportunities that are out there," Maxwell says. While it may be well-intended advice to help independent operators save money on taxes, the sheer volume of information out there can be overwhelming. This is why Maxwell recommends operators make sure they have a trusted tax advisor. "Talk to somebody that has experience with restaurants, because there are unique things like the FICA tip credit," she says.

Tax advisors who are familiar with restaurants will often know the right questions to ask. They can help operators understand what credits they are eligible for, which ones they're not eligible for, and how they can become eligible for anything they do not currently qualify for.

A restaurant-savvy tax advisor can also work with operators on developing processes and keeping things organized. This makes tax preparing easier and helps in situations when the RS sends a letter requesting more information on a filing.

START WITH A CPA

Given that most restaurants that fail do so because of inadequate financial controls and projections, it's essential to spend some serious time looking at and talking about dollars and numbers with a professional, who can also help you develop the best tax strategy, especially if you are purchasing an existing operation.

"Generally, most people drawn to the restaurant business love to cook and love to entertain, but unfortunately these people are usually not the type who can get their heads around numbers," says Jim Laube, president of RestaurantOwner.com, and a former certified public accountant (CPA), who has spent more than 35 years advising restaurants.

Similarly, many people envision a huge cost associated with hiring professional guidance in the legal and financial arenas. That's not necessarily so, particularly when the restaurateur can effectively communicate his wants and needs in a clear and concise manner.

First, determine if you need an accountant or a CPA. An accountant is an individual who usually has a two- or four-year degree in bookkeeping and/or accounting and is familiar with general accounting principles. A CPA is certified by the American Institute of Certified Public Accountants, participates in ongoing professional development and is considered an expert in general accounting principles. A CPA is going to cost you more money, but can provide a greater range of services from tax planning to investments and more. A CPA who understands the restaurant business is the gold standard for in- dependent operators.

Then, you must determine what you want the accountant to do for you. Do you want this person to provide monthly ongoing services, such as bookkeeping, invoicing and paychecks? Many small-business owners are comfortable with handling such daily or weekly chores themselves, but others become easily frustrated and bored with tasks that take them away from the dining room or kitchen, the places of action in the restaurant.

"You might save some money by doing this yourself, but if it generates frustration or takes away from your greater contributions in other elements of running a restaurant, perhaps you want to consider having a professional handle this," Laube says. You may wish to consider an accounting firm that offers non-certified accountants to handle the ongoing work, which may be billed at a lower rate than the larger, more comprehensive services of a CPA when those services may be necessary.

The good news for those who choose to do the monthly ongoing services themselves is that it's a lot easier than it used to be. A number of online services, such as RestaurantOwner.com, offer a variety of downloadable forms and programs that simply walk you through the process. Other business financial accounting programs, such as QuickBooks or Peachtree, make accounting services much simpler and less time-consuming than ever before.

You should have your decisions made about an accountant as soon as you get a bank account. Even if you can put forth financial projections, you should run it past a CPA for input and feedback. "Whatever you do, don't ask your Uncle Bob or Cousin Charlie to do the accounting for you," Laube says. "You've got to have someone who understands the restaurant business, and someone who will not hesitate to offer constructive criticism or point out problem areas for you."

A CPA is also in a better position to work with an attorney on legal issues and make recommendations on the intricacies and structure of your business. If they have the exposure to small business and investor startup, they can guide you on the more common ways of splitting the action before and after payout. An attorney can offer good advice after you present your proposed investment structure. "This is a make-or-break decision," Laube says, adding, "Don't take it lightly."

Why Your Restaurant Should Use a Four-Week Accounting Period

Over the years, I've asked independent operators if they prepare their financial statements every month. If they acknowledged that this is their practice, I ask if they find it useful to compare their current end-of-month P&L (profit-and-loss statement) to the previous month. Most of them say it is not, because there are different numbers of days from one month to the next.

And then I ask them about the usefulness of comparing their current month P&L to the P&L for the same month last year? Many restaurants do 45-percent to more than 60-percent of their sales two days of the week – typically Friday and Saturday. You might not get excited about a 12% comparative increase in sales during the current month, if this year's included five weekends.

With these and other shortcomings inherent in monthly P&Ls, many restaurants, nearly all the larger chain operators, prepare their financial statements every four weeks. They have 13 four-week periods a year, instead of 12 monthly statements.

While the four-week cycle makes a lot of sense operationally, many smaller restaurant companies avoid it because of resistance from their bookkeepers or accountants. Here are some common reasons for contesting the conversion to a four-week accounting cycle and why you should have one, regardless.

But… my bank statements come monthly, not every four weeks. True, but most banks will cut off your statement when you want them to; just give them a schedule with your four-week cutoff dates. It's also possible to gain access to your account electronically. This will enable your accountant to reconcile at any time without having to wait for a statement to arrive in the mail.

But… what about expenses such as rent, lease payments and utilities that we pay once a month? It's fairly easy to set up a schedule on a spreadsheet and expense 11/12ths of each monthly payment and place the remaining 1/12th into a prepaid account. Once a year the balance in the prepaid accounts is expensed into period 13.

But… what about sales tax that's paid monthly? Many states will allow you to pay sales taxes 13 times a year instead of 12 monthly payments. If not, it's still not difficult to keep sales tax payments on a monthly schedule.

But… our accounting software won't accommodate a 13-period year. Then update your accounting software. Nearly all accounting software packages priced today have flexible reporting period capabilities.

For any accounting system to work, you need to insist that your bookkeeper or CPA provide timely financial reports. This is critical during periods 10 and 11 of a 13-week accounting cycle, when you need to reconcile accounts, analyze cash flow, conduct tax planning and strategy, reflect on your goals and identify shortcomings and solutions, and create a budget.