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By Raffi Yousefian
Restaurant taxes for 2021 are going to look similar to 2020 because most of the government relief and tax programs enacted in 2020 have continued through 2021. However, this year there will be no extension in the deadline!
At this point, you’re probably overwhelmed by the many tax incentives and relief programs available for your restaurant, which ones still apply, and how they will affect your 2021 taxes – not to mention all the time spent hunting for last-minute restaurant tax deductions.
But don’t panic. Restaurant accounting and tax specialists have navigated many operators through millions of dollars in relief and helped them become cash flow positive through the pandemic. By working with a seasoned accountant, like those at The Fork CPAs, you can ensure that filing your 2021 restaurant taxes is (virtually) pain-free.
In this article, you’ll get a step-by-step action plan for you and your accountant to use over the next couple of months to ensure you’re maximizing cash flow for your restaurant and preparing yourself to navigate the shifting industry landscape. This article will also cover:
Before diving into the top restaurant tax season tips, here are some key due dates that U.S. restaurants should be aware of:
September 30, 2021:
December 31, 2021:
March 15, 2022:
April 18, 2022:
June 15, 2022
September 15, 2022:
October 17, 2022:
December 31, 2022:
These are U.S. Federal tax deadlines, however, there are also state tax deadlines that vary from state to state.
Now that you have all the important dates top of mind, let’s explore how you can get your restaurant taxes organized and increase cash flow during tax season.
Before you begin the 2021 tax preparation process, ensure you’ve taken advantage of the 2021 Employee Retention Tax Credit (ERC), which can be applied for retroactively. This article assumes you already took advantage of the 2020 ERC, and both rounds of PPP, if not, please check with your CPA or accounting professional.
Employee Retention Credit (ERC):
For every quarter in 2021 through September 30 that you experienced a 20% decline in gross receipts or were ordered to partially or fully shut down by the government, you can receive a $7k refundable tax credit per employee on payroll.
The credit is equal to 70% of [up to $10k in] wages that you pay to an employee during an eligible quarter (more on this here). If you haven’t already requested the credit, you can request it now by filing an amended payroll tax return with the IRS.
For example, if you paid 30 employees $10k each in a qualifying quarter, then you could receive $210k (30 employees times $7k per employee) cash per qualifying quarter from the IRS.
Although you can’t claim the credit on wages paid after September 30, 2021, there is an exception for recovery start-up businesses. Recovery start-up businesses are employers that began business after February 15, 2020, have average annual gross receipts for the 3-taxable-year period of less than $1M, and do not otherwise qualify for the ERC. A recovery startup business can claim up to a $50k ERC per quarter but only applies for Q3 and Q4 2021 and qualification is determined on a quarter-by-quarter basis.
Paycheck Protection Program (PPP) Loan Forgiveness:
When calculating the qualifying wages for the ERC, calculate your PPP loan forgiveness amount in tandem. The key tactic here is to allocate the least amount of wages to PPP loan forgiveness as possible so that you can leverage the remaining wages for the ERC.
The minimum amount of payroll costs required to ensure full PPP loan forgiveness is 60% of your total loan amount. The remaining 40% can be used for other operating expenses. Do not apply for PPP loan forgiveness before applying for the ERC, because once you claim those wages for the PPP, then you can’t claim them for the ERC. Once both (ERC and PPP loan forgiveness) calculations are complete, submit your payroll tax filings amendments to request the ERC. Then, submit your PPP loan forgiveness application.
PPP 2 & ERC 2 Interplay:
As mentioned above, wages paid with PPP funds can’t be used to claim qualified wages for the ERC. Many payroll providers allowed employers to activate the ERC in their system so the credit could be received in real-time instead of later through an amended payroll filing. By activating the ERC credit with your payroll provider, they will automatically apply all of the wages paid in an eligible quarter as qualified wages to claim the ERC for you. The problem is that once you do this, you’ve made the election to not use these wages for PPP forgiveness. To get your PPP 2 loan forgiven, you need to spend 60% of the total loan amount on payroll costs.
With that said, the following steps are recommended:
1. Do not activate the ERC 2 in your payroll system until your PPP 2 covered period has ended.
2. After the PPP 2 covered period has ended, you can calculate the minimum wages you need to get your PPP 2 loan forgiven, and remove those costs from your ERC 2 qualified wages.
3. After you know the ERC 2 qualified wages adjusted for PPP 2, you should amend the quarterly payroll returns that include your PPP covered period, to claim the refundable credit.
Beware, not following this process could make you ineligible to receive the full ERC 2, or have to pay back some of your PPP 2 loan!
It’s important to prepare and file your 2021 income tax returns only after the ERC and PPP loan forgiveness are complete because each of these will affect your taxes.
Here’s what you need to do for your 2021 restaurant taxes to make sure you’re filing strategically:
1. Reduce your 2021 wages deduction by the ERC amount
Even though you haven’t received the credit yet, the amount is known and determinable. Therefore it needs to reduce your wages deduction and be booked as a receivable, or book the tax difference on your tax return.
If you file your returns before making this entry, then you will have to amend your 2021 tax returns to reflect the ERC, which is never recommended for a variety of reasons.
2. Recognize the PPP loan forgiveness as tax exempt income
If you generated tax losses or deductions in 2021 using capital that owners didn’t contribute (such as via PPP), then your partners and shareholders may not have enough basis to claim these losses on their personal returns. (see the IRS at-risk rules for more info on this). Therefore, you should apply for forgiveness before preparing the tax returns because the forgiveness will generate tax exempt income that will restore basis. It will increase the likelihood that your partners or shareholders can claim the losses from 2021 on their personal tax returns.
3. Recognize tax deductions, credits, grants, and PPP correctly
If you received any of these credits or grants, make sure your accountant is aware of the following:
Ensure you are taking advantage of the following:
4. Claim 100% bonus depreciation for leasehold improvements
Qualified improvement property is now eligible for 100% bonus depreciation deduction for the year it is placed in service. Basically, you can now write off your qualified build-out and construction costs in the year placed in service, instead of depreciating over 39 years. This can create massive deductions for your partner or shareholders that they could potentially apply towards other taxable income.
5. Use the enhanced inventory donation deduction
If you donate food to a non-profit then you can deduct up to double what you paid for it as a charitable contribution.
You should also note that the limit on the enhanced deduction for donating food inventory was increased from 15% of taxable income to 25% for 2020 and 2021. Additionally, nonitemizers will now be able to deduct up to $300 for single taxpayers, or $600 for married taxpayers in charitable contributions on their personal returns, making this deduction more relevant than ever.
6. Claim the losses!
Last year, the limitation on claiming business losses was lifted in response to the pandemic. For 2021 taxes, the limitation is back. Net operating losses (NOLs) that arose in a tax year beginning after 2017 may not offset more than 80% of a taxpayer’s taxable income for the tax year to which it is carried. In addition, an unused NOL arising after 2020 can no longer be carried back to claim a refund for taxes paid in prior years. Instead, an unused NOL must be carried forward indefinitely.
The Restaurant Revitalization Fund (RRF) is a program that issued tax-free grants to restaurants equal to their pandemic-related revenue loss. The grant proceeds must be used to pay for qualified expenses between February 15, 2020, through March 11, 2023. By December 31, 2021, all RRF grant recipients were required to report through the SBA RRF application portal how much of their award had been used against each eligible use category. If the grant proceeds were not fully expended prior to December 31, 2021, then grant recipients will be required to complete annual reporting submissions until they fully expend the award funding or the period of performance expires. If you haven’t submitted your RRF expenses in the SBA’s RRF application portal, then make sure to do so and continue submitting at the end of each year until the grant proceeds have been expended on eligible expenses.
There are an endless amount of federal and state grant and lending programs for restaurants. Check out the TouchBistro Restaurant Recovery Navigator and your state’s restaurant association website for relief options available to your restaurant.
The last two years have taught operators that they need to have real-time visibility into their restaurant accounting. Yet, many operators still don’t have this visibility because they haven’t upgraded their systems or chosen the right accountant.
Fortunately, funds from many of the grants listed above can be reinvested to solve this problem – it’s just a matter of finding the right technology and CPA.
When evaluating new technology or an accountant, remember to keep the following in mind:
To ensure your restaurant financials stay in tip-top shape, you can take the following steps:
1. Implement a modern cloud that integrates with your payroll system, such as TouchBistro. Using a modern POS can help you collect key business reports and other financial data from your restaurant.
2. Use a food, labor, and inventory management integration such as MarginEdge. MarginEdge automates the flow of your POS sales data directly into your accounting software, helping you automate tedious processes, connect systems, and radically streamline key activities such as cost tracking.
3. Implement a web-based accounting system like QuickBooks Online to sync your inventory and the sales data with your accounting documents. This kind of automation helps to reduce bottlenecks and excessive bookkeeping hours – especially ahead of restaurant tax season.
4. Lastly, and perhaps most importantly, hire a restaurant expert CPA and bookkeeper team to oversee it all and provide weekly reports to you.
Taking the steps listed above will give you the infrastructure and visibility needed to make tactical decisions, such as proper cash flow management, in a timely fashion (not just once a year).
There’s no question that the last couple of years have been a rollercoaster ride for U.S. restaurants with many unprecedented challenges along the way. However, your 2021 restaurant taxes should not be one of those challenges. With the proper planning, systems, and advice, you can actually come out of this pandemic cash flow positive.
Raffi is a CPA who believes that small businesses should be empowered with the same financial data as Fortune 500 companies. He discovered that restaurant operators were not getting useful information to make key management decisions, therefore he made it the mission of his firm to empower restaurateurs with real-time visibility into their financials. When he’s not crunching numbers at The Fork CPAs, Raffi enjoys the gym, skiing, music, and consuming delicious food, beer, and wine.
By Katherine Pendrill
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