2012 is coming to an end, and it’s time for small business owners to start gathering the paperwork to file their taxes. Before stamping and sealing that envelope, make sure that you have gone over with a CPA or tax advisor any and all possible deductions or credits your business may qualify for. Here are a number (not all) of credits / deductions that are often taken advantage of by restaurants, concession stands, and convenience / grocery stores.
Section 179 Deductions: The Section 179 Deduction has been renewed, and remains one of the best deductions a small business can take. There are two parts of the equation working in unison on this deduction.
- Standard Section 179 Deduction – Business are allowed to claim up to $139,000 from their gross income for the purchases of new and used equipment (as long as the used equipment is “new to you”). This includes any and all kitchen equipment (not smallwares, furniture, or other items, they will be covered later), computers, registers, computer software (as long as it is a pre-existing program not a custom proprietary system; management software such as POS qualifies for the deduction), and even a vehicle can fall into this category. Vehicles, however, have a number of other criteria they must adhere to before they qualify for this, which can be found here: http://www.section179.org/section_179_vehicle_deductions.html
- Bonus Depreciation – If a business exceeds $139,000 in qualifying equipment purchases, but does not exceed $560,000, they can take what is known as “bonus depreciation” on that equipment, as long as it is new. Bonus depreciation cannot be taken on used equipment. A bonus depreciation deduction works as such: After the $139,000 is deducted, the remaining amount of new equipment purchases up to $421,000 ($560k - $139k = $421k) will be granted a one time bonus depreciation of 50%, as well as 20% of the remaining cost as depreciation for this business year and the 4 years to come. For amounts that exceed the $560,000 limit, there are specific dollar to dollar deduction amounts that can be obtained through the IRS.
- Example – A company buys $200,000 of new equipment. They can deduct the max deduction of $139,000, then deduct the 50% bonus depreciation of remaining amount (50% of $61,000 = $30,500), and then also deduct 20% of the remaining amount for this year and the next four years (20% of remaining $30,500 = $6100 x 5 years). Therefore, a business that spends $200,000 on new equipment in 2012 can deduct $175,600 of that on 2012’s taxes, and then $6100 for the following 4 years (2013-2016). This deduction would roughly yield about $61,000 in tax savings at a tax rate of 35%.
Cost Segregation / Depreciation: Many of the other purchases a business makes can have depreciation values that can be deducted. These depreciation values are variable, and dependant on the variety of item. These are only a few of the principle ways cost segregation can work into your end-of-the-year tax plans.
- Smallwares & Tax Form 3115 – Existing businesses (this does not apply to upstart business) can apply to a change in their accounting strategy with Form 3115. Smallwares, especially things like glassware, can be hard to take into account because they can be lost or broken much easier than most equipment. This change in accounting allows restaurants to account for the depreciation of smallwares, and may be the best way for foodservice operations and convenience / grocery stores to account to account for shrink.
- Section 1245 Property – Property that falls into what the IRS classifies as “Section 1245 property” are items that have a shorter cost recovery period, and usually depreciate relatively quickly. Equipment of all sorts falls under this category, as well as things like furniture, beverage equipment, décor, etc.
- Section 1250 Property – Property that falls into “Section 1250” depreciates much slower than items in Section 1245, and usually pertains to the building that houses the business. Things like materials purchased for repairs, sinks, restroom accessories like hand dryers, and the building itself fall into this category.
For a detailed explanation on cost segregation (http://www.irs.gov/pub/irs-utl/restaurant_cost_segregation.pdf ) or changing your accounting strategy with Form 3115 (http://www.irs.gov/pub/irs-pdf/i3115.pdf ) check with your accountant or tax advisor.
Employee Related Tax Credits: There are a number of employee related credits small business owners can take advantage of that will help them come tax time. This is a very basic description of these credits. To find out if your business qualifies, please consult your CPA or tax advisor.
- Work Opportunity Credit – This credit has been a part of the tax system in various forms since the Reagan era, and continues to evolve every year. This credit gives tax credits to employers that hire veterans, at-risk youths, felons, and others that may have difficulty finding employment.
- Empowerment Zone Employment Tax Credit – Certain areas of the country are classified by the Dept. of H.U.D. as Empowerment Zones (EZ). These zones are areas in which business development and job creation are of paramount importance, and businesses that reside in and hire employees from inside these zones are eligible to take a credit based on the wages they pay those employees. For information on the Empowerment Zone, take a look at Form 8844 (http://www.irs.gov/pub/irs-pdf/f8844.pdf ).
- Small Business Health Care Tax Credit – There is still an employer health care tax credit, but after recent Supreme Court decisions it is changing shape. It no longer covers 100% of employer health care expenditures, and recent legislation regarding American health insurance has made business owners responsible for part of their employees’ health care costs. For more information on the new healthcare reforms and how it affects your tax credit, speak with your CPA or tax advisor.
- General Business Credit – Form 3800 is the form for a general business credit that can be applied to your taxes. It binds many of the other available tax credits available to business together with one form, and is available online here: http://www.irs.gov/pub/irs-pdf/f3800.pdf
ENERGY STAR® Energy / Water Efficiency Credits: ENERGY STAR is a government program run and regulated by the EPA that rates equipment and materials across all industries on energy and water efficiency. Products that carry the ENERGY STAR logo have to adhere to a number of guidelines set forth by ENERGY STAR and prove that they are indeed efficient enough to meet the EPA’s standards. Not only are energy savings inherent in buying ENERGY STAR equipment, but there can be rebates and tax credits to qualifying businesses that meet or exceed particular regulations. To find out more on the ENERGY STAR incentive plan for the commercial foodservice industry, stop by the ENERGY STAR website (www.energystar.gov/cfs/incentives ).
Carryback / Carryforward: Business owners may, depending on how their business performs, utilize what is known as “carryback” and “carryforward”. If a business reports a loss when filing their end of the year taxes, they can retroactively carry some of those losses back to their previous year’s taxes to reduce their current tax liabilities; this is what’s known as carryback. Carryforward is when a business that reports a loss carries some of that loss forward to the next year’s taxes, rather than backwards. Carryback used to apply to the 5 years of a business’s old tax forms, but recent legislation in tax law reduced this to 2 years. If your business is reporting a loss on this year’s taxes, consult your CPA or tax advisor about carrying back some of the losses.
**This guide is for reference only. It is NOT a replacement for an accountant or tax advisor.