Tax Planning in an Environment of Unknowns

As we approach the end of 2015, it’s time to consider tax-saving opportunities for your business. While we’re still waiting on Congress to decide whether to extend or modify certain beneficial tax provisions for restaurants that expired in 2014 (e.g., enhanced Section 179 expensing provisions, 15-year lives for depreciating restaurant buildings and improvements, bonus depreciation, Work Opportunity Tax Credit), there are some moves you can make before the year draws to a close.

Cost Segregation

If you constructed or purchased any buildings or leasehold improvements during 2015 or in a recent year, a cost segregation study should be on your short-list of projects to complete in the near future.  Cost segregation is a process of breaking down a building or leasehold improvements to identify portions of the construction that can be taken over a shorter five year tax life for restaurant depreciation purposes.  The improvements made often contain items that are obvious to categorize under this shorter life, but other larger items are frequently overlooked.  These studies require a professional to run calculations and properly document a report that will stand up to IRS audit.

Repairs & Maintenance versus Capitalize

Regulations were recently issued that help to evaluate whether an expenditure should be expensed as a repair or capitalized and depreciated over a period of time.  The tax benefits that portions of these regulations bring to restaurants should not be overlooked. 

While the definition of repair itself has not changed (keeping something in normal operating condition), the regulations offer a change in the evaluation process to allow certain situations where large expenditures for replacement assets could still be expensed as a repair.  For example, if you have 4 HVAC units on top of your restaurant and one of them stops working, you can expense the replacement HVAC unit, assuming you replace the old unit with a similar new one (similar output and efficiency).  In the past, companies would look at the cost of the replacement and capitalize it, but the new rules offer a different approach to evaluating a repair to a “unit of property” or system, instead of just looking at the cost.  Prior to year end, an evaluation of repair versus capitalized items should be done to make sure you are taking advantage of all tax deductions available.  One important note: Just because you capitalize an item for GAAP purposes does not mean that you have to also capitalize it for tax purposes.  Companies do have the opportunity to retroactively benefit from these new rules by filing a Form 3115, Change in Accounting Method, after calculating the remaining depreciation to be taken on any capitalized assets that should have been expensed as a repair in prior years under these new rules.

Capitalization Policies

As we approach year end, it is also a good time to take a look at your capitalization policy for the coming year to make sure you don’t miss out on any immediate deductions.  The new regulations provide certain “safe harbor” dollar amounts for these policies depending on whether you have a financial statement audit or not.  If you have opened several new restaurants during the year that caused the size of your company to grow substantially, consider reevaluating the threshold for when you capitalize assets versus expense them.  One common error we find is that not everyone involved in the process of determining whether to capitalize or expense knows the details of their own policy, or they do not apply it correctly.  The most common error is using the total invoice cost against the capitalization policy instead of applying it on a per-item basis.  For example, if an invoice for four computers is $2,000 and the capitalization policy is $1,000, the correct application of the policy would be to expense the $2,000 because each computer ($500 each) is below the policy threshold.

Work Opportunity Tax Credits (“WOTC”)

While we are still waiting for this credit to be extended to include new hires in 2015, industry observers believe that the extension will happen soon.  This federal tax credit benefits companies that hire certain candidates from targeted groups that face challenges in finding employment.  This credit requires outside assistance in qualifying candidates and calculating the credits, but the benefits often outweigh this additional cost.

Retirement Plans / Incentive Plans

January 1 is an ideal time to implement new retirement and incentive plans as the new year kicks off.  As small restaurant companies continue to grow, they hit a point where they want to start rewarding and incentivizing their employees and key executives with the hope of boosting morale and staying competitive. As we’ve discussed in a previous blog post, any restaurant company looking to put a plan in place will need to start considering which employees they want to target and how they want to reward them.

This article originally appeared in the Fall 2015 Selections newsletter. For more information, please contact Jeff Tubaugh at jtubaugh@bdo.com. And be sure to keep up with the Restaurant practice’s latest thoughts by following us on Twitter at @BDORestaurant. 

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