Tax Tips for Independent Restaurateurs

Few restaurant owners find it easy to navigate Internal Revenue Service rules as they apply to their business. Yet an understanding of changes in the tax code may save them money and avoid audits. We asked Lisa Haffer, a lawyer and certified public accountant who works as a tax partner in the Cincinnati office of SS&G Financial Services, for an overview of several new IRS provisions that operators may not be aware of.

“What do owners need to keep abreast of?
Among the areas often missed by restaurants and their CPAs are: tax treatment of smallwares and expansion costs, potential exclusion of tenant-improvement allowances from income, gift-card deferral rules, and five-year depreciable life for most restaurant equipment.

What are the issues regarding gift-card deferrals?
Gift cards are a very hot area with the IRS, and one area tax examiners are likely to focus on when auditing a restaurant company. Restaurant operators may not be aware there are two tax-deferral opportunities for gift-card revenue: a one-year and a two-year deferral of unredeemed gift-card revenue.

But there's a catch, right?
Operators may not be aware of the requirements that must be adhered to for the more generous two-year deferral. For example, the same taxpayer that sells a gift card must be the one who redeems it. So gift-card sales by a franchisee that can be redeemed across the nation at another franchise location may not qualify for the two-year deferral. Using the two-year deferral also requires you to attach a statement to the tax return each year, setting forth the activity in the gift-card liability account.

FICA tax credits are generating interest because of new benefits to operators. Can you explain the advantages?
For years FICA credits could not be used to offset alternative minimum tax. As a result, taxpayers either ended up with a surplus of unused credits that they carried over from year to year, or they simply elected not to claim the credit at all.

What changed?
Effective for credits generated in 2007, FICA credits and the Work Opportunity Tax Credit can be used to offset alternative minimum tax. So credits generated in 2007 and future years are going to be very valuable to restaurants and their owners.

Can you explain the new “bonus” depreciation rules?
Most assets of any business that were placed in service in 2008 qualify for the 50 percent so-called “bonus” depreciation. For restaurants this actually translates into a 60 percent depreciation deduction. If that seems confusing to operators, I advise leaving the math up to their accountants. But restaurant owners should understand that this 60 percent figure is in contrast to 20 percent under the former law.

Are there other IRS issues operators need to be aware of?
They should ask a tax professional about the recent IRS extension of the favorable 15-year depreciable-life provision for leasehold improvements and other restaurant property, which includes buildings. It's a complicated issue.

(to read the original article by David Farkas, go to www.chainleader.com/article/CA6617994.html?industryid=47554)