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.
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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.
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. For 2013, the dollar limitation for Code Sec. 179 expensing is a generous $500,000 with a $2 million investment limitation. Under current law, these amounts are scheduled to fall significantly after 2013 (to $25,000 and $200,000, respectively). Additionally, there are special temporary rules that allow for expensing of real property that may benefit restaurant and hospitality industry businesses.
Certain restaurant property placed in service before January 1, 2014 may qualify for a 15-year recovery period. Generally, the property must be an improvement to the restaurant building.
Smallwares are items such as flatware, glassware and dishes -- all commonly used in the restaurant and hospitality industry. The IRS has authorized restaurant and tavern owners to use a safe harbor method of accounting for smallwares. Under this safe harbor, restaurants and taverns may deduct the cost of qualified smallwares in the year purchased. Small appliances costing $500 or less are included in the smallwares category. However, there is one important limitation: the safe harbor method does not apply to start up costs.
Beverage & Alcohol Taxes
Manufacturers, importers, and distributors of alcoholic beverages may deduct state and local excise taxes imposed on alcoholic beverage sales receipts. This treatment, however, does not apply to sellers of alcoholic beverages.
We have highlighted only some of the many federal tax laws that impact restaurants and hospitality businesses. Every business is unique with particular tax considerations. Please contact our office so we can set a time to discuss your business in more detail.
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.
In general, the tips your employee receives from customers are subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Both directly and indirectly tipped employees must report tips to you. However, an employee is not required to submit a report for any month in which his or her tips are less than $20.
Your employee may report the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. The statement must be signed by the employee and must include:
the employee's name, address, and SSN,
your name and address,
the month or period the report covers, and
the total of tips received during the month or period.
Employer FICA Obligations
Tips received by an employee in the course of your employment are considered remuneration and are considered to have been paid by you for purposes of computing your share of FICA taxes. Therefore, as an employer, you are required to pay social security tax on the amount of tips received by the employee up to and including the contribution and benefit base, and to pay Medicare tax on the total amount of tips received by the employee.
However, if the employee either does not furnish the statement or if the statement furnished is inaccurate or incomplete, then the remuneration is considered to be paid on the date on which notice and demand for the taxes is made to you by the Internal Revenue Service (Service). An employee who fails to report tips required to be reported to an employer is subject to a penalty equal to 50 percent of the employee share of FICA taxes on those tips, unless the employee can provide a satisfactory explanation showing that the failure was due to reasonable cause and not due to willful neglect.
Credit for Employer Share of FICA Taxes Paid
A tax credit is available to businesses that provide, deliver, or serve food or beverages for consumption. Qualified employers may claim a credit for Social Security and Medicare taxes paid or incurred on certain employees’ tips. Generally, the credit equals the amount of employer Social Security and Medicare taxes paid or incurred on tip income in excess of the Federal minimum wage rate that was in effect on January 1, 2007.
For purposes of applying these rules, it is important to distinguish tips from service charges. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. Specific criteria should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages.
The absence of any of the following factors creates doubt as to whether a payment is a tip and may indicate that the payment is, in fact, a service charge:
the payment must be made free from compulsion;
the customer must have the unrestricted right to determine the amount;
the payment should not be the subject of negotiation or dictated by employer policy; and
generally, the customer has the right to determine who receives the payment.
For example, the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages and not considered tips for computing the tax credit.
Although the IRS has provided a one-year extension for the proper treatment of tips and service charges, all employers with establishments where tipping is customary should review their operations to ensure they understand the difference and are in compliance with IRS guidance as soon as possible. In addition, there may be an opportunity to take advantage of the available tax credit. Please call our office for an appointment. We will be happy to assist you.