Restaurant taxes for 2020 are going to look very different from any other year.
At this point, you’re probably overwhelmed by the many tax incentives and relief programs available for your restaurant, and how they will affect your 2020 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 RY CPAs, you can ensure that filing your 2020 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 for a strong come-back. This article will also cover:
- Important restaurant tax deadlines for 2021
- 5 steps you need to take to increase cash flow during tax season
Important Deadlines for Restaurant Taxes in 2021
Before diving into the top restaurant tax season tips, here are some key due dates that you should be aware of:
December 31, 2020:
- 2020 Employee Retention Credit expiration
March 15, 2021:
- 2020 Federal Partnership tax return deadline
- 2020 S-corporation tax return deadline
March 31, 2021:
- Paycheck Protection Program expiration (subject to change)
April 15, 2021:
- 2021 Federal Individual tax estimated payments deadline
- 2020 Federal Corporation tax return deadline
May 17, 2021
- 2020 Federal Individual tax return deadline
September 15, 2021:
- Extended 2020 Federal Partnership tax return deadline
- Extended 2020 S-corporation tax return deadline
October 15, 2021:
- Extended 2020 Federal Individual tax return deadline
- Extended 2020 Federal Corporation tax return deadline
December 31, 2021:
- 2021 Employee Retention Credit expiration
These are deadlines as they stand, but it’s important to keep in mind that many of these dates are subject to change due to outstanding legislation and discussions in congress.
5 Steps to Increase Restaurant Cash-Flow During Tax Season
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.
Step 1: Leverage the 2020 ERC and Apply for PPP Loan Forgiveness
Before you begin the 2020 tax preparation process, ensure you’ve taken advantage of the 2020 Employee Retention Tax Credit (ERC), which can be applied for retroactively.
Employee Retention Credit (ERC):
For every quarter in 2020 that you experienced a 50% decline in gross receipts or were ordered to partially or fully shut down by the government, you can receive a $5k refundable tax credit per employee on payroll.
The credit is equal to 50% of wages that you pay to an employee during an eligible quarter. (more on this here). You can apply for this credit now and request a refund from the IRS.
For example, if you paid 30 employees $10k each in a qualifying quarter, then you could receive $150k (30 employees times $5k per employee) cash from the IRS.
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.
Step 2: File Your 2020 Taxes Strategically
It’s important to prepare and file your 2020 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 2020 restaurant taxes to make sure you’re filing strategically:
1. Reduce your 2020 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 2020 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 2020 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 2020 on their personal tax returns.
3. Recognize tax credits, grants, and PPP correctly
If you received any of these credits or grants, make sure your accountant is aware of the following:
- Many grants, like the EIDL advance, are considered nontaxable for Federal tax purposes, but may be treated differently by your state.
- Paid sick and family leave tax credits need to be reported as other income, not a reduction to wages deduction.
- Some states are not recognizing PPP expenses as deductible for state tax purposes, or they’re treating PPP forgiveness as taxable income.
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 losses 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 in charitable contributions on their personal returns, making this deduction more relevant than ever.
6. Claim the losses!
Finally, if your 2020 tax returns have generated a loss after following the steps above, you can carry back those losses all the way back to 2015, and offset prior taxable income to claim a refund for taxes paid in prior years – that will provide some quick cash!
Step 3: Take Advantage of the 2021 ERC and PPP 2
Paycheck Protection Program (PPP) 2:
This is referred to as PPP 2 because it’s the second round of PPP and the calculation has changed in favor of restaurants.
As you’ll recall, the first round of PPP provided 2.5x your payroll costs. Restaurants can now apply for 3.5x payroll costs. However, to apply for PPP 2, you must have experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019 (more info is available here).
Employee Retention Credit (ERC) 2:
This is referred to as ERC 2 because the rules and calculation method for claiming the ERC changed in 2021.
For every quarter in 2021 that you experience a 20% decline in gross receipts or are ordered to partially or fully shut down by the government, you can receive a $7k refundable tax credit per employee you have on payroll. The credit is equal to 70% of wages that you pay to an employee during an eligible quarter (more info is available here).
PPP 2 & ERC 2 Interplay:
As mentioned in step 1, wages paid with PPP funds can’t be used to claim qualified wages for the ERC. 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!
Step 4: Apply for the Restaurant Revitalization Fund (RRF) Grant
The Restaurant Revitalization Fund (RRF) was part of the recently passed American Rescue Plan. Under the new plan, an eligible entity can receive a tax-free grant amount equal to their pandemic-related revenue loss, that must be spent on qualified expenses over a covered period in 2021.
This means you could receive a tax-free grant equal to the difference between your 2020 revenue and 2019 revenue – minus amounts you received from the PPP. This is a program that the National Restaurant Association has been fighting for since the pandemic started, and it has finally been passed, so take advantage of it!
Step 5: Apply for Other Federal and State Grants
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.
Step 6: Know Your Financials In and Out
The pandemic has 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:
- Make sure that all moving parts, such as your POS, delivery services, payroll, tips, and cash deposits are being reconciled and reported to ensure no theft, errors, or waste.
- Ensure that you track key performance indicators (KPIs) proactively to measure management effectiveness. When owners/operators try to cut back on restaurant bookkeeping costs or avoid adopting new tech, they often end up paying double what they would have paid due to tax penalties, theft, excessive food/labor costs, and mismanagement.
To ensure you restaurant financials stay in tip-top shape, you can take the following steps:
1. Implement a modern cloud or hybrid POS 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 year has been a rollercoaster ride for restaurants with many unprecedented challenges along the way. However, your 2020 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.