September 1, 2020

How a CARES Act Correction to Qualified Improvement Property Can Increase Cash Flow for Bars and Restaurants

After the Tax Cuts and Jobs Act (TCJA) of 2017 brought some unintended consequences to the tax treatment of qualified improvement property, a long-awaited change has come that could provide an immediate cash flow opportunity for restaurants, bars and the hospitality industry as a whole. Businesses that have made any qualified improvements such as ceilings, installation of drywall, interior doors, electrical or plumbing during the last two years can benefit from a technical correction made by the Coronavirus Aid, Relief and Economic Security (CARES) Act.

While the pandemic has had a particularly difficult effect on those in the restaurant and hospitality industry, this new tax savings opportunity could go a long way in helping those within the industry recoup some of the income lost during this time.

Bonus Depreciation Eligibility

Before COVID-19, many restaurants, breweries and bars made improvements to their nonresidential buildings during the last couple of years, such as updating a lobby, kitchen, or distillery. Whether these improvements were remodels, new signage or drive thru windows, these large expenditures were most likely then met with a much higher tax liability than anticipated for 2018 and 2019. The CARES Act provided a technical correction that most have been waiting for since the end of 2017. The CARES Act treats Qualified Improvement Property (QIP) as 15-year property, resulting in taxpayers being eligible to take 100% bonus depreciation on QIP rather than the previously stated depreciation over 39 years. This change is retroactive to January 2018.

Taking Advantage of the New QIP Rules and Retroactive Benefits

It’s important for restaurants and all businesses who have yet to file their 2019 return to re-evaluate all potential QIP for this tax saving opportunity.

Taxpayers who have filed their 2018 and/or 2019 tax returns, and had placed  QIP in service, may consider amending their 2018/2019 return to treat any QIP as 15-year property and eligible for bonus depreciation. Another option to filing an amended return, taxpayers may consider filing Form 3115, Application for Change in Accounting Method, with their 2019 tax return (if not yet filed) or their 2020 tax return and claim the previously missed depreciation as a 481(a) adjustment. This change in accounting method will allow taxpayers to “catch up” all missed QIP depreciation from the beginning of 2018 to current.

Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential impacts and benefits. Visit our COVID-19 Resource Center for more resources. To discuss your situation and recovery options, contact an Anders advisor below.

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July 16, 2019

How Restaurants Can Utilize Bonus Depreciation and Section 179

Accelerating depreciation can provide large tax savings for restaurants and retailers following the Tax Cuts and Jobs Act (TCJA). Bonus depreciation and the Section 179 deduction allow taxpayers to take accelerated depreciation on certain assets, which can be a great tax planning opportunity to take advantage of. Below we dive into the details of bonus depreciation and Section 179, what type of property qualifies and any restrictions.

Bonus Depreciation

Under the TCJA, 100% depreciation is allowed for certain assets purchased between September 28, 2017 and December 31, 2022. Unlike Section 179, bonus depreciation can be used to generate a taxable loss. Taxpayers are not required to take bonus depreciation, and an election out of bonus depreciation can be a useful tax planning tool in the right circumstances.

Qualifying Property

To be eligible, property must be tangible personal property depreciated under the Modified Accelerated Cost Recovery System (MACRS) method with a recovery period of 20 years or less. This includes new or used property such as:

  • Restaurant furniture
  • Restaurant equipment
  • Land improvements

With some exceptions, Qualified Improvement Property (QIP) consists of improvements made to the interior of a restaurant that occurs after the building has already been placed into service.

Restrictions

QIP generally does not include restaurant buildings or improvements to the exterior of restaurant buildings. Under tax reform, QIP was not designated as either 15-year property nor as eligible for bonus depreciation. Currently, QIP does not qualify for bonus depreciation because it does not have a recovery period of 20 years or less. Until technical corrections are issued, QIP should be depreciated over 39 years or could be eligible for the Section 179 deduction.

Section 179

The Section 179 deduction is another useful tax planning tool that allows restaurants to take the total amount of depreciation of an asset in one year. Under tax reform, the maximum amount a taxpayer can expense increased to $1,000,000 with a phase-out limitation of $2,500,000.

Qualifying Property

Qualified real property now includes QIP and certain improvements such as:

  • Alarm systems
  • Fire protection
  • Roofs
  • HVACs

As we addressed above, only certain items are considered QIP, and the eligibility of such property should be evaluated before electing to take the Section 179 deduction.

In many cases, a restaurant or retailer should be eligible for either bonus depreciation or Section 179 on fixed asset purchases. Contact an Anders advisor with questions on how bonus depreciation and Section 179 can be used to your benefit, or learn more about Anders Lodging, Food and Beverage services.

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June 18, 2019

Top Tax Reform Provisions Impacting Restaurants

The food and beverage industries face a number of advantages and disadvantages brought on by the Tax Cuts and Jobs Act (TCJA). Some of the most important changes impacting restaurants include the lower corporate tax rate, depreciation changes and new pass-through rules.

Corporate Tax Rate

Restaurants structured as a C Corporation may see a dramatic reduction in tax rate. Prior to the TCJA, corporate tax rates varied from 15% to 35%. Beginning January 1, 2018, the C Corporation tax rate is a flat 21%. This change will have a positive impact on all C Corporations that have had taxable income above $50,000. Those C Corporations that had taxable income below $50,000 will actually see an increased tax rate from 15% to 21%.

Pass-through Income

Any restaurants that are structured as pass-through entities may see a benefit from the lowering of the individual tax rate reduction. In 2018, the highest individual tax rate was lowered from 39.6% to 37%. The total income that places an individual in the top tax bracket was also increased resulting in a further tax benefit.

Qualified Business Deduction

All restaurants structured as an S Corporation or Partnership will also see some positive changes regarding tax rates. Pass-through entities can now claim a new 20% Qualified Business Income Deduction. This deduction from taxable income decreases the maximum marginal tax rate on pass-through income from 37% to 29.6%.

Net Operating Losses

As of December 31, 2017, net operating loss deductions are limited to 80% of taxable income.  This calculation is determined without regard to the deduction. These losses arising after December 31, 2017 may also only be carried forward. This 80% limitation may put businesses in a situation where they have substantial losses one year and end up with taxable income in the following year.

Business Losses

Business losses at the individual level are now only permitted in the current year to the extent that they do not exceed the following:

  • Taxpayer’s gross income
  • $500,000 for joint filers or $250,000 for other taxpayers

Bonus Depreciation and Section 179

The restaurant industry will also see benefits from changes in depreciation rules. The maximum bonus depreciation expense increased from 50% to 100% on certain capital expenditures. This means that certain fixed assets, including the purchase of used furniture, fixtures, and equipment, purchased after September 27, 2017 can be fully deducted in the current year.

Meals and Entertainment Expense

Beginning in 2018, entertainment expenses are no longer deductible unless already included in employees’ income. This pertains to all expenses including recreation activities, facilities, or any membership dues related to such activities. Any food or beverage expenses associated with operating a trade or business will still receive a 50% deduction.

Minimum Wage

The House version of this bill initially included an increase in the per hour minimum wage used for the FICA Tip Credit. The final bill elected to continue to use the 2007 minimum wage of $5.15 for tax years beginning on January 1, 2018.

The Tax Cuts and Jobs Act has created many new planning points for restaurants. Contact an Anders advisor to determine the most advantageous tax planning opportunities for your restaurant. Learn more about Anders Lodging, Food and Beverage services.

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June 3, 2019

Crafting a Process: How Inventory Applications Can Help Breweries Succeed

Keeping up with and tracking inventory can be a daunting task for craft breweries, especially with a variety of brews and distribution points. Inventory applications provide more transparency, allowing management to track the flow of inventory before it becomes a final product. If you’re considering implementing an inventory application in your brewery, it’s important to evaluate the potential benefits and recommendations for use.

Benefits of Using Brewery Inventory Apps

Using an inventory app improves efficiencies within the brewery by streamlining a number of processes and offering benefits, including:

Batch Timelines

Batches can be tracked throughout the brewing process. You can know at any time that batch A is X number of hours into the fermentation process.

Transparent Inventory Levels

You can monitor inventory levels for all products and ingredients to easily identify when a resource or finished product is running low. This also helps increase the likelihood of catching theft. For instance, a red flag might be that a product keeps running low in the system, but there aren’t sales reported.

Centralized Reporting

An inventory app creates a centralized location for receiving, sending, and recording all purchases orders, sales orders, invoices, bills, etc. Everything inventory-related gets recorded into the system.

Easy Recordkeeping

Many applications sync with accounting software platforms, eliminating the need to record items twice.

Accurate Financials

Inventory apps provide a more accurate cost valuation of inventory, which will lead to more accurate margins for finished products.

Profit Margin Insights

You can monitor specific product margins and their sales trends using an inventory app, giving more visibility to see which beer and packaging results in the highest profit margin. This helps reduce product loss from spoiled batches as breweries can better anticipate the fluctuation of sales.

Examples:

  • When we brew batch A, it is more profitable to sell the beer in cans rather than bottles or kegs, but batch B is more profitable in bottles.
  • Batch A has a better profit margin than batch B.
  • We sell more stout beer in winter, might consider brewing more stout beer and fewer lagers.

Tips for Implementing Inventory Apps

Once you decide to implement an inventory app, below are a few tips for using a brewery application.

  • Breweries should still perform physical counts outside the system to ensure the inventory is moving through the system properly.
  • Before creating a new product or item in the inventory system, consult with the application support team/accountant to ensure the product is mapped correctly to the general ledger.
  • When removing a step from a brewing process, consult with the application support team/accountant to see if removing this step will cause inaccuracies in cost valuation of inventory.
  • Have a deadline for when inventory items must be entered into the system (i.e. 5th business day all items must be recorded in the system). Allowing backdating of inventory could lead to management hiding costs of inventory in prior periods.
  • Do not record inventory items outside of the system. This will lead to inaccurate margins, and decrease efficiencies because now inventory is being tracked in multiple areas.

Interested in learning how an inventory application can help your brewery? Contact an Anders advisor to learn how an inventory app can help your brewery, or learn more about the Anders Outsourced Accounting Services Group or our Lodging, Food and Beverage Services.

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May 31, 2019

Offered Loan Advisory to Multi-Location Restaurant to Save $240,000 in Interest

A local restaurant client had opened another location utilizing financing through an SBA loan. Our team came in and provided loan advisory services to identify the best loan and banking organization to fit the needs of their business. We were able to introduce them to a middle market bank with restaurant experience to help their seasoned business reach profitability faster. After devising a plan to pay off the variable rate SBA loan, we helped pair them with a conventional fixed loan. The restaurant saved $30,000 per year in interest over the remaining eight years of the SBA loan, offering an extra $240,000 to invest back in their business. The new banking relationship also offers intangible savings such as better cash management and security advantages.

Learn more about our Lodging, Food and Beverage services.

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May 31, 2019

Checklist for Opening Another Restaurant

Are you thinking about expanding your restaurant portfolio? Are you READY to open another restaurant? Whether you are opening another location or branching out to create a restaurant unlike anything you currently have, research, dedication, and a well-thought-out plan is crucial.

Considerations Before Expanding Your Restaurant Portfolio

Ask yourself a few questions prior to making your decision:

  • Are you willing to invest the hours it takes for another successful restaurant?
  • Is your current restaurant so busy that you can’t handle the crowds?
  • Do your customers travel from a distance to visit your restaurant?
  • Do you have funding?
  • Will opening another restaurant increase your capital?

Steps for Opening a Successful Restaurant

If the answers are yes to the above questions, you may be ready and should consider each of the following steps as you expand your restaurant business.

Finalize Funding

Opening a restaurant will certainly require capital. After developing a budget to determine the amount of capital needed, will you be funding the new business yourself, taking on outside investors, or utilizing business loans? Any route taken will need careful consideration and planning as each come with their own set of pros and cons. It’s highly recommended that you do NOT utilize funds from your current restaurant to open your new one – in fact, you should make sure your current restaurant is in good standing and financial health before jumping to start another location.

Location, Location, Location

Finding the right location for your new restaurant is one of several key elements to its success.  You’ll want to consider things such as distance from your other restaurant, understanding the area and its demographics, your potential competition and the demand for your proposed concept.

Develop Business and Marketing Plans

Using your experience within the restaurant industry and advice from your inner circle, consider whether you can duplicate processes, systems and marketing tactics from your other restaurant to make things easier. Develop your plans and operations in a way to accommodate future growth and scalability. Understand the location and your target audience to develop the marketing plan in the most effective way.

Hire the Right Management

Owning multiple restaurants may come with increased hours of work. Surround yourself with the right management teams – you cannot be two places at once. Empower and trust the manager at your current location to have success in running and managing the restaurant operations. Make sure the management team has a good, trusting relationship with your employees, and understands the high quality and service expected. You will still want to check in several times a week, but you will likely spend more time and energy at the new restaurant in the early stages.

Purchasing Equipment, Supplies & Inventory

It may be easier the second time around, but remember to measure your space prior to purchasing equipment, appliances, and furniture. Make sure you are set up in a way that utilizes your space properly, creates efficiencies in the kitchen and creates an atmosphere to enhance your guest experiences. Consider using similar types of equipment and the same vendors/suppliers to create consistencies and economies of scale.

The Anders Lodging, Food and Beverage Group will work with you not only on tax planning and compliance, but will also assist with business decisions and analysis of restaurant operations and cashflow. Contact an Anders advisor to discuss our services that can help your restaurant.

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