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Tax Incentives for FoodService Operations

The IRS provides many opportunities to reduce your business and personal tax burden. Review the items below to discuss with your business accountant.

The Small Business Jobs & Credit Act of 2010 allows taxpayers to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property it also increases the amount a taxpayer can write-off up to $500,000 of qualified capital expenditures -- subject to a phase-out once these expenditures exceed $2,000,000 -- for tax years 2010 as well as 2011. It also extends the additional, first-year 50% depreciation for qualifying property purchased and placed in service during the 2010 tax year (as originally enacted within the 2008 Stimulus Bill described above). 

Update: For the year 2013, the section 179 limits were increased by the "American Taxpayer Relief Act" - qualified capital expenditures can be written off up to $500,00 once total expeditures exceed $2,000,000 in the 2013 tax year. Bonus depreciation was also reinstated, which allows larger businesses that exceeded the $2,000,00 capital expenditure cap to write-off 50% of qualified asses using first year Bonus Depreciation. For more information on stimulus acts that effect the Small Business Act of 2010 and ongoing business legislation, refer to section179.org

For more information on small business taxes as it directly applies to restaurant operations visit the IRS.gov website's Restaurant Tax Center.

Smallwares Accounting Method

Restaurant and tavern owners can change accounting methods to expense the cost of replacement dishware, glassware and other items that previously had to be depreciated. The smallwares method of accounting allows restaurants and taverns to deduct the cost of these replacement items in the year purchased<.

Smallwares consists of items in the following categories: glassware, flatware, dinnerware, pots and pans, table top items, bar supplies, food preparation utensils and tools, storage supplies, service items and small appliances costing $500 or less. Being actively engaged in the in the business of operating a restaurant or tavern that prepares food and beverages is the only way to use the smallwares accounting method. It isn't available for new business start-up purchases of smallwares and does not apply to items purchased and stored at a warehouse or location other than the restaurant or tavern where the items are used.

To use this method ask your accountant about Form 3115, Application for Change in Accounting Method.

Cost Segregation

A professional cost segregation study will classify your assets, establish a depreciable life for each asset, leading to an improved cash flow on your property. While you must depreciate your restaurant's building over 39 years, non-structural improvements can depreciate faster. Food concession operators in amusement parks qualify for 7-year depreciation schedules. Gas stations and convenience stores are able to depreciate buildings and improvements over 15 years.

The IRS has posted a matrix to advise operators how to recover costs through depreciation of tangible property used in the operation of a restaurant business. An asset that is classified I.R.C. Section 1245 property has a shorter cost recovery period of 5 or 7 years, whereas Section 1250 property has longer cost recovery period, at either 39, 31.5 or 15 years. The most common example of section 1245 property is depreciable personal property, such as equipment. The most common examples of section 1250 property are buildings and building components, which generally are not section 1245 property.

Below are examples of some cost segregation in the restaurant industry. For a complete list, refer to the IRS website.

Beverage Equipment
Equipment for storage and preparation of beverages and beverage delivery systems. Beverage equipment includes the refrigerators, coolers, dispensing systems, and the dedicated electrical, tubing or piping for beverage equipment. The dispensing system may be gravity, pump or gas driven.
Property Type: 1245 - Distributive Trades and Services; Recovery Period: 5 Years
Food Storage and Preparation Equipment
Food storage, cleaning, preparation, and delivery systems including all machinery, equipment, furniture and fixtures used to process food items from storage through delivery to the customer.
Property Type: 1245 - Distributive Trades and Services; Recovery Period: 5 Years
Furnishings
Booths, tables, chairs, lockers, benches and other furniture needed in the business operation that is not a building component.
Property Type: 1245 - Distributive Trades and Services; Recovery Period: 5 Years
Restroom Accessories
Includes paper towel dispensers, electric hand dryers, towel racks or holders, cup dispensers, purse shelves, toilet paper holders, soap dispensers or holders, lotion dispensers, waste receptacles, coat hooks, grab bars, mirrors, shelves, vanity cabinets, counters and other items generally found in public restrooms that are built into or mounted on walls or partitions.
Property Type: 1250; Recovery Period: 39 Years - Building or Building Component
Employee Tax Credits
Work Opportunity Tax Credits - Businesses can take a tax credit of up to $2,400 for the first year of employment of each 18-to-39 year-old new employee who lives in an RC or EZ. WOTC is available for employees who begin work before September 1, 2011.

Employers can verify their business location and employee's address as being inside the RC or EZ on HUD’s Address Locator.

Please note: This is a reference guide and should not be viewed as a substitute for professional advice given by a CPA.


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