The 2023 tax season should be (hopefully) more straightforward than the last two years. We are not expecting ever-changing, last-minute tax legislation, and most of the ambiguities related to recent tax changes have been clarified by the IRS – all of which will make it easier to file your restaurant taxes.
However, if you’re still a bit overwhelmed by the upcoming tax season, don’t worry because you’ve come to the right place. TouchBistro has enlisted the help of the experts at The Fork CPAs to help you head into tax season with a strategic cost-savings plan. Rather than simply help you organize your tax documents, this article will provide a comprehensive roadmap for taking advantage of proven tax strategies and restaurant tax deductions to mitigate taxes and increase cash flow in your restaurant. These are the same strategies used by the seasoned accountants at The Fork CPA to reduce taxes for hundreds of restaurants, both big and small.
By the end of this article, you’ll have:
- A list of important U.S. restaurant tax deadlines for 2023
- A breakdown of important restaurant tax incentives
- A three-step action plan for increasing restaurant cash flow during tax season
Important Deadlines for Restaurant Taxes in 2023
Before we jump into the fun stuff, we’ll start with summarizing the upcoming tax deadlines so you can plan accordingly.
January 31, 2022:
- 2022 Form 1099 filing
March 15, 2023:
- 2022 Federal Partnership tax return or extension
- 2022 S-corporation tax return or extension
March 31, 2023:
- 2022 Form 8027 for tipped establishments
April 15, 2023:
- 2022 Federal Individual tax returns or extension
- 2022 Federal C-corporation tax returns or extension
- 2023 Federal Q1 Individual tax estimated payments
June 15, 2023:
- 2022 Federal Q2 Individual tax estimated payments
September 15, 2023:
- Extended 2022 Federal Partnership tax return
- Extended 2022 S-corporation tax return
- 2022 Federal Q3 Individual tax estimated payments
October 17, 2023:
- Extended 2022 Federal Individual tax returns
- Extended 2022 Federal Corporation tax returns
April 15, 2024:
- Last chance to file a quarterly 941-X form to claim a 2020 Employee Retention Credit (ERC)
April 15, 2025:
- Last chance to file a quarterly 941-X form to claim a 2021 Employee Retention Credit (ERC)
These are U.S. federal tax deadlines, however, there are also state tax deadlines that vary from state to state, so make sure you’re aware of all applicable deadlines for your specific business.
Important Restaurant Tax Incentives
Now that you know the timeline for taxes this year, let’s take a look at the restaurant tax deductions, incentives, and opportunities for preparing this year’s restaurant taxes. And remember, this isn’t just about understanding how to file taxes for a restaurant, but about how to take advantage of important restaurant tax incentives.
Employee Retention Credit (ERC)
If you’re a restaurant, you most likely received the ERC in 2022 as a result of claiming it in 2020 and 2021. If you did not receive any ERC payments, then we suggest reaching out to your tax advisor to request this credit because it is highly beneficial and almost every restaurant qualifies in some shape or form.
As shown in the deadlines above, you have until April 15, 2024, to claim the ERC for 2020, and until April 15, 2025, to claim the ERC for 2021. Everything you need to know about the ERC is explained here. We’re happy to advise you if you submit an intake form here.
If you received ERC payments in 2022, then you can treat these as tax-exempt income because you should have reduced your salaries and wages deduction by the ERC amount in the year in which the ERC relates to. If you didn’t do this, then you will need to amend the tax returns for the years in which you claimed the ERC. For example, if you submitted a 2020 ERC claim for $150k, then you must reduce the wages deduction on your 2020 tax return by $150k. If the $150k was received in 2022, then it is treated as tax-exempt income in 2022.
FICA Tip Credit
We can’t write an article about restaurant taxes and not mention the FICA tip credit. The FICA tip credit allows tipped establishments (defined by the IRS) to claim a dollar-for-dollar tax credit for any social security and medicare taxes paid on their employee’s tip income in excess of the federal minimum wage. Almost every full-service restaurant where tipping (not service charges) is customary, qualifies for this credit. This credit is usually substantial since most tipped employees get paid well in excess of the federal minimum wage, especially in high-cost places like NYC, D.C., and San Francisco.
Tenant Improvement Allowances
Tenant Improvement Allowances, more frequently referred to as “TI,” are landlord incentives to get tenants into a new space by giving them an allowance for construction or equipment. These incentives are not going anywhere, yet the tax implications are frequently misunderstood or not considered. The tax treatment of the allowance and resulting improvements depends on who owns the improvements. Generally, if the tenant is the owner, then the restaurant is taxed on the entire allowance in the year it is received. In order to avoid this, restaurants can make a section 110 disclosure on their tax return to claim that their lease is a short-term retail lease. You should ask your accountant to confirm whether you qualify for this exception. If the landlord is the owner, then the allowance can typically be applied toward the cost of the leasehold improvements thus reducing the depreciation deduction.
Discerning ownership of leasehold improvements is determined by the lease, therefore the tax implications should also be taken into consideration during the lease negotiation and drafting process.
3 Steps to Increase Restaurant Cash Flow During Tax Season
Now that you know the tax incentives and opportunities available for restaurants, we will provide a simple three-step approach for reducing taxes and increasing cash flow in your restaurant.
Step 1: Carry Back Your Net Operating Losses
If you incurred net operating losses (NOLs) from your restaurant in 2018, 2019, or 2020, then you can carry back these losses up to 5 years and apply them toward taxable income to claim a refund for any taxes you paid in those years. This is a temporary provision allowed by the CARES Act that was passed as a result of the pandemic. Otherwise, your NOLs will carry forward indefinitely. You must file an amended return to claim these losses within 3 years after the due date of the return (including extensions) for the tax year of the net operating loss. For example, if you incurred a NOL in 2020, and extended your 2020 personal tax return, then you can file an amended personal tax return by October 15, 2024, to claim the refund.
It’s extremely important to take advantage of this provision if you have NOLs because, after 2020, NOLs that arose in a tax year beginning after 2017 may not offset more than 80 percent of the taxpayer’s taxable income for the tax year to which it is carried.
We suggest claiming NOL carrybacks before preparing your 2022 tax returns because the unused amount of NOLs (if any) will affect your taxable income for 2022.
Step 2: Claim Sec 179 and Bonus Depreciation Strategically
Sec 179 and bonus depreciation are tax incentives that allow you to write off capital assets entirely in the year of acquisition instead of depreciating them over the life of the asset. This includes kitchen equipment, furniture, improvements, build-out, etc. The main differences are that (1) the Section 179 deduction cannot generate a loss for your business that allows you to apply that loss against other sources of taxable income, and (2) Sec 179 has a limit. Therefore, it is typically more beneficial to claim 100% bonus depreciation for Federal tax purposes and most accountants do so by default.
Many states don’t allow you to claim bonus depreciation or the section 179 deduction, therefore it is added back to your state taxable income resulting in a large state tax compared to the federal tax you may owe. The opportunity here is that some states, like Virginia, allow you to claim the section 179 deduction, but none of the bonus depreciation deduction. As a result, you could allocate a portion of your depreciation to section 179 instead of bonus depreciation if it benefits your state taxes and is not detrimental to your federal taxes. In conclusion, make sure you or your accountant is taking the state tax implications of accelerated depreciation into consideration when choosing how to depreciate your improvements or fixed asset purchases.
Step 3: Elect to Pay State Tax at the Entity Level
After the Tax Cuts and Jobs Act (TCJA) of 2017, most taxpayers are no longer able to claim a deduction for state income taxes they pay at the personal level. As a result, many states – especially high-tax states like Virginia and Maryland – have passed legislation that allows pass-through businesses (partnerships, sole proprietors, S-corporations) to pay state income tax at the business level instead of at the owner level so the business can claim this as a state tax deduction. When preparing your state business income tax returns, you should determine whether your state is offering this opportunity and whether it will benefit you.
Ongoing Planning for Tax Season
These strategies and incentives will help you reduce your taxes and increase cash flow in your restaurant during tax season. However, tax planning should be done throughout the year by giving your accountant real-time access to accurate financials. In order to get real-time access to accurate financials without breaking the bank, it’s essential to implement state-of-the-art web-based systems like TouchBistro and MarginEdge in your restaurant, and to work with an accountant and bookkeeper who can integrate all of these systems together to produce data that will help you manage your restaurant’s budget, improve operations, and plan strategically for filing your restaurant taxes. Plus, you can always visit The Fork CPAs blog for some helpful tips along the way.
Raffi is a CPA and CEO of The Fork CPAs. The Fork CPAs provides restaurant owners with frictionless, streamlined, and modern restaurant bookkeeping and tax services. They believe that with the appropriate technology and accountant, restaurants of all sizes can access the same financial data as national restaurant chains. When he’s not crunching numbers, Raffi enjoys the gym, skiing, music, and consuming delicious food, beer, and wine.
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