Restaurants have two 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
Engineering-based Cost Allocation
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
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.
Two of the biggest tax provisions that affect the restaurant industry are the 15-Year Restaurant Depreciation and the Worker Opportunity Tax Credit.
Both tax provisions expired at the end of 2011 but look like they are back with the initial passing Family and Business Tax Cut Certainty Act.
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
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:
- Veterans receiving food stamps or are unemployed suffering a service related disability
- Former Felons
- Disconnected Youth
- Family Members receiving TANF
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.
You are a small business owner who owns and operates a restaurant. Your time is consumed with ensuring tables are turned and your business is moving forward. You do not have time to research specialized tax incentives let alone determine if you qualify. You are not uncommon.
Below is a brief summary of tax incentives you may be missing out on:
- Commercial Building Tax Deduction
Tax deduction for expenses incurred for energy efficient building expenditures
- Engineering-based Property Cost Allocation
Recover costs through deprecation of tangible property used in the operation of a restaurant business.Qualified Items Include: Beverage Equipment, Storage Area, Furnishings, Bar Area, Flooring, Lighting, Wiring, Sound System, and Kitchen Area
- Employee Tax Credits
Local, State, and Federal Incentives to hire and retain employees. Available credits up to $9,000 per qualified new hire.Credits are available for employees in the following categories: Those living in Empowerment Zones, Young Adults, Wounded or Disabled Veterans, Food Stamp Recipients, and those receiving Supplemental Security Income
- Commercial Property Tax Reduction
Reduction available on both Personal and Real Property Taxes paid.
- Section 179
Can take an increase in deduction up to $35,000 of the cost of eligible equipment purchases
The above is merely a brief list of some of incentives you could benefit from if you are a restaurant owner. The easiest way to determine your qualification is to ask an expert.