2016 Year in Review: Tax Planning for Restaurants

As 2016 comes to an end, taxpayers need to be proactive in year-end tax planning. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), was signed into law in December 2015 and made many changes that are effective with 2016 tax returns. Restaurants, in particular, should be aware of the following items in this Act:

Certain accelerated filing deadlines: For the 2016 tax year, the due dates for filing W-2 and W-3 Forms, as well as certain 1099-MISC Forms, are now due by January 31, 2017. Additionally, penalties have increased for late information return filings.

Changes to due dates for C corp. and partnership tax returns: Starting with 2016 tax returns, the due date has been moved back a month to the 15th day of the fourth month for calendar year C corporations, with a five-month extension available.  2016 calendar partnership tax returns are due a month earlier, March 15, 2017, with a six-month extension available.

Code Sec. 179 expensing: The PATH Act permanently set Code Section 179 expensing of qualified property at $500,000 with a $2 million investment limit prior to phase out. These amounts are indexed annually for inflation. The 2016 amounts are $500,000 and $2.01 million. The $250,000 cap on qualified real property is no longer in effect, starting with 2016 tax returns. Keep in mind that the property does not have to be new to qualify for Sec. 179. Air conditioning and heating units are now eligible for expensing starting in 2016.

Bonus Depreciation: 50% bonus depreciation is available for 2016 tax returns. A new category of property, “qualified improvement property” (QIP), applies in 2016 and permits the 50% bonus on certain 39-year property, among other things. QIP removes the third-party lease requirement and the three-year building age rule. Also, an election is permitted for corporations to forego bonus depreciation and instead, increase the amount of unused alternative minimum tax credits.

Research Credit: The PATH Act made the research credit permanent and more useful to small businesses. Recently, the IRS final regulations were issued with additional potential opportunities.

Work Opportunity Tax Credit: This credit was modified starting in 2016 to include hires of qualified, long-term individuals unemployed for 27 or more weeks.

Repair Regulations: Ensure the policies are being followed if you have filed accounting method changes, such as making annual elections as required and reviewing the de minimis capitalization thresholds for compliance. Taxpayers taking advantage of the de minimum thresholds should have a written capitalization policy in effect. Effective in 2016, the de minimis safe harbor limit was increased to $2,500 for taxpayers without an applicable financial statement. It remains at $5,000 for those with applicable financial statements. As a reminder, an applicable financial statement is defined as a certified audited financial statement.

Remodel-Refresh Safe Harbor: Restaurants should consider filing an accounting method change to treat 75% of qualified remodel-refresh costs as currently deductible repair expenses. Once an accounting method change is filed, future remodels in the same trade or business would be subject to the safe harbor provisions. An applicable financial statement is required to use the safe harbor method.

Shorter Recovery periods for certain property: The 15-year life for qualified leasehold improvements (QLIP), qualified restaurant buildings and improvements (QRP), and qualified retail improvements (QRIP) is now permanent.

FICA Tip Tax Credit: This is a credit against federal tax for payroll taxes employers pay on certain reported tips. Make sure you claim the credit if your operation has tipped employees.

Food Inventory Charitable Contributions: Several changes for 2016 were made to Sec. 170(e)(3), which allows an enhanced deduction for food contributions. A taxpayer-friendly change was made in the determination of the fair market value of food contributions. Restaurants should consider setting up a program to use this tax benefit.

Empowerment Zone Credit: This is a credit against federal tax for salary paid to employees who both live and work in designated zones. Be sure to check for new locations to determine if they are within a designated zone.

Tenant Improvement Allowances: Money received from a landlord can be excluded from taxable income in certain instances under Sec. 110. Be sure to follow the requirements in the code and regulations, including having the proper lease language.

If you’d like to discuss any of the above topics, you can contact Phil Hoffman at [email protected] or Julie Komnick at [email protected]. And be sure to keep up with the Restaurant practice’s latest insights by following us on Twitter at @BDORestaurant.