The end of the year can be a great time for restaurant owners. With family in town, many people will venture out to their favorite restaurants as opposed to making a big meal in their own kitchen, which can be great for business.
The end of the year is also a great time for business owners to review their financial picture and do some restaurant tax planning. Here are some of the most common questions we get on year end tax planning and some key strategies for you to use this planning season.
What Tax Deadlines do I need to be aware of for quarterly payments?
For individuals (namely restaurant owners of passthrough type businesses), the dates to have marked on your calendar are April 15, June 15, September 15 and January 15 of the following year. On or before these days, you need to have your quarterly taxes paid into the IRS.
If you own a C Corporation, the only change to the above dates is that the 4th estimate is due December 15th instead of January 15th of the following year.
How to pay your restaurant’s income taxes
You can pay online in many cases, which is a great way to ensure your federal income tax payment is properly applied (and you get automatic confirmation). You can still write a check and mail in to the taxing agency, but checks are not always cashed in a timely manner, which can wreak havoc on cash flow planning for business owners.
How much do I need to pay in estimated taxes?
There are really two ways to make sure you are paying in enough taxes so that you do not get slapped with underpayment penalties. The first method is to calculate your actual tax due on a quarterly basis, and remit the amount on the due dates listed above. This can certainly be a more accurate way to determine how much you should pay, however that kind of mid-year calculation can be time consuming and confusing.
The second method to determine your restaurant’s quarterly tax rate is by using the “safe harbor” method. Essentially, The IRS will look at your prior year tax and multiply it by 110% (100% if your income in that year was less than $150,000). Divide that result by 4, and simply pay in that amount of tax each quarter. (Note that your state rules may differ from this).
The key is always to try and pay the least amount of tax possible, though. If you have a situation where you had a stellar year in Year 1, but Year 2 is not looking as good, you certainly would not want to make Safe Harbor estimates in Year 2, as you would be overpaying your taxes, which you could not receive back until you file your tax return. In that case, you’d want to use method 1, and pay in at least 100% (90% if prior year income was less than $150,000) of the current year tax in order to be safe from underpayment penalties.
What if my business is seasonal?
If your restaurant has a particularly busy time of year, like tax season is busy for us, as compared to the rest of the year you may need to implement some unique tax strategies such as “annualizing” your income when filing your tax return to minimize penalties.
The IRS deems all your taxable income to be earned evenly throughout the year, unless you tell them otherwise. By doing this annualization, you can pay your estimated taxes to match the cashflow of your business, without being deemed to have underpaid your taxes in a particular quarter. Your CPA can help you with this calculation and can also help determine your estimated tax payments if you have a particularly seasonal business model.
Each restaurant business is unique. Henry+Horne’s restaurant specialists can help design a tax strategy that optimizes tax deductions and tax credits while helping you stay on top of your sales taxes, FICA taxes paid and payroll taxes. Reach out today.
What about my accounting period – can I change that?
All individuals are calendar taxpayers – meaning that they file taxes based on a January to December year – no matter what. Businesses have some flexibility in determining their tax year, meaning restaurant taxes don’t have to be paid by April 15.
However, passthrough entities that ultimately report their earnings to the owners, who then pay the tax at the individual level on their personal tax returns, have a litany of rules and regulations to deal with to have a “fiscal” or non-calendar year.
The IRS may require you to pay a deposit equal to their deemed interest on the “deferred tax” of a fiscal year passthrough. Suffice it to say, this can get very convoluted, and many times may not be worth the headache. But if you have a seasonal business that earns a vast majority of revenue in a small window, it bears the conversation with your CPA to determine if being a fiscal year filer for future tax years makes sense for you.
What tax planning ideas can I implement before the end of the year?
There are a host of tax planning strategies to take advantage of before the end of the year this year (and by no means is this an all-inclusive list). Here are a few strategies to reduce your taxable business income and optimize tax deductions and credits.
Barring a law change, 2022 represents the final year of 100% bonus depreciation. That means starting January 1, 2023, restaurant businesses will no longer be able to write off 100% of their fixed equipment purchases (at that point it will be 80%, and will step down 20% per year until it hits 0%).
A word of warning though – I always tell clients that no one has saved money by spending $1 they didn’t need to in order to save 30 cents in tax. As restaurant operators, you will always lose on that transaction.
If you have legitimate restaurant industry equipment/furniture/asset needs, it would be smart to make those purchases before the end of 2022 to make use of the 100% bonus depreciation. The effect of bonus depreciation on your income tax return isn’t the same as tax exempt income but it’s pretty close!
Passthrough Entity Taxes
For restaurant owners of passthrough entities – many states have enacted Passthrough Entity Taxes, which is a way for owners to get around the current $10,000 State and Local Tax cap on their personal Federal taxes. Essentially, the restaurant pays the owner’s state income tax on income from that business, and passes a tax deduction to the owner, which is not limited to $10,000. This is a new field and we are constantly learning more, so it makes sense to talk to your CPA about this if you feel you may qualify.
Tax incentives and other savings opportunities
Lastly, there are plenty of incentives to look into for restaurant owners. If you purchased a new building for your restaurant, look into doing a cost segregation study to accelerate how much depreciation you can take on the building.
Restaurant operators also may qualify for Research and Development credits which can save thousands in taxes for doing things you already do on a day-to-day basis.
There is also a federal tax credit related to employees who qualify for the Work Opportunity Tax Credit, which can provide a tax credit for hiring certain underprivileged persons or Veterans of the US military.
Why work with Henry+Horne
Tax planning is one of my favorite times of the year because it’s when we can really help our restaurant owner clients plan for the year ahead and save some serious dollars in tax. Don’t wait for tax season to get proactive on your tax strategies. The Henry+Horne restaurant group is experienced and knowledgeable with all things restaurant tax and accounting.
The benefits of restaurant tax planning
Reach out to your Henry+Horne advisor for some more assistance or more targeted planning ideas so we can help with your tax return before the ball drops on New Year’s Eve. Our restaurant accounting specialists will develop a customized tax optimization plan that will save you money and take full advantage of all the credits and deductions available to restaurant owners and operators. When next tax season rolls around, you’ll already be on the dance floor!
Contact your Henry+Horne Restaurant CPA today with any questions.
Brock Yates, CPA, M.T.