Five Common Myths that Lead to Tax Reporting Errors

We often receive questions or overhear comments from restaurant owners, operators, and CFOs about misconceptions in the industry. Five common myths are outlined below:

Myth #1: “The money I spend eating at competitors’ restaurants is fully deductible because it is research.”

Truth: The cost of such “research” is considered a meal and entertainment expense by the IRS and is only 50 percent deductible for tax purposes.

Myth #2: “When I sell a holiday gift card with an incentive attached (e.g., customer pays $25 but receives a $30 gift card), I can expense the discount when the card is sold.

Truth: When such a gift card is sold, the discount expense is deductible in the tax year in which the card is redeemed (same treatment for GAAP).

Myth #3: “My tipped employees only need to report tips of 8 percent rather than the total amount of tips earned.”

Truth: The 8 percent rate used for analysis on Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) is only used for tip allocation purposes. Using this rate does not mean that directly tipped employees must report 8 percent. Tipped employees should report the full amount of actual tips received.

Myth #4: “I can defer the revenue from a gift card sale until the gift card is redeemed.”

Truth: The IRS has three approved methods for recording taxable income from gift cards:
  • Cash basis method: Income is recorded on the tax return in the year the gift card is sold.
  • One-year deferral method: Income is recorded at the earlier of either the redemption of the gift card or one taxable year following the sale of the gift card.
  • Two-year deferral method: Income is recorded at the earlier of either the redemption of the gift card or two taxable years following the sale of the gift card. (This method is only available if the gift card can only be sold and redeemed by the same taxable entity.) Myth #5: “I have to use the current federal minimum wage of $7.25 for purposes of computing the FICA tip credit on my federal tax return.
Truth: Congress froze minimum wage at $5.15 per hour for the purpose of calculating the FICA tip credit. Take advantage of this in order to maximize eligible tips and the value of the credit. If you use $5.15 per hour in the calculation, a larger credit will result since fewer tips are needed to bring cash wages to $5.15 than to $7.25.