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Restaurant and Hospitality

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The restaurant and hospitality industries have their own set of tax planning opportunities.  

State and Local taxes are of particular concern to this industry being that they must deal with Sales Tax filing compliance.   

From an accounting perspective, businesses must have someone with enough accounting knowledge that can verify integrations with POS systems and General Ledger accounting.

Setting Tables at a Restaurant

In General

Large Food and Beverage Establishments

The IRS has special tip reporting and allocation rules for "large food and beverage establishments." A large food and beverage establishment is a food or beverage operation where tipping is customary and that normally employed more than 10 employees on a typical business day during the preceding calendar year. Owners of large food or beverage establishments must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.  In some cases, large food and beverage establishments must allocate tips among employees.



All cash tips are included in an employee's gross income and subject to federal income tax. Cash tips include tips received from customers, charged tips (such as credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement.  An employee must report cash tips to his employer if they amount to $20 or more in a calendar month. If an employee fails to report tips to the employer, the employer is not liable for the employer share of FICA taxes on unreported tips until the IRS makes notice and demand to the employer.

Tip Compliance Programs

The IRS has developed programs to help employers stay in compliance with the rules for tips. The Tip Rate Determination Agreement (TRDA) requires that tips be reported at or above a specific rate negotiated between the employer and the IRS. The Tip Reporting Alternative Commitment (TRAC) agreement requires that the employer provide ongoing education to tipped employees on tip reporting procedures. Another program, the Employer-designed Tip Reporting Alternative Commitment (EmTRAC), allows employers to design educational programs and tip reporting procedures.

Restaurant Equipment

Code Sec. 179 allows taxpayers to deduct all or part of the cost of qualified equipment in the year it was placed into service rather than depreciating it over time.  

Tip Compliance and Credits

Extension for Proper Treatment of Tips and Service Charges

The IRS has extended the time for businesses to comply with the rules regarding the proper characterization of tips and service charges. This extension is provided in order to allow businesses not currently in compliance with additional time to modify their business practices and make needed system changes.

Previously, the IRS issued guidance that clarifies and updates existing guidelines on the taxation of tips. The guidance covers employer and employee obligations under the Federal Insurance Contributions Act (FICA) with respect to tips received by employees. Included in the guidance is a clarification of the classification of a payment as a tip or a service charge. This guidance was originally to be applied to amounts paid on or after January 1, 2013. However, based on the comments received, the IRS has determined that an extension to January 1, 2014, is appropriate.

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