Apple Growth Partners

Year-End Tax Planning Tips for Restaurants

Chef in Restaurant Reviewing Financials

Dirk Ahlbeck, CPA | Principal | National Restaurant Practice Lead

Owning and operating a restaurant can have significant perks, with a side of complexities. Mainly, understanding and forecasting taxes for restaurants, which can cause headaches among other responsibilities. Proactive tax planning is a must and should be completed prior to 12/31 of the calendar year to identify opportunities. Tax rules often change; best practice recommends business owners should understand the rules as stated currently, while being aware of potential future changes.

Closing out 2022, here are the key considerations for restaurant owners:

  1. Employee Retention Tax Credit (ERTC)

The ERTC is an excellent credit and taxable in the year of the filing. If the ERTC had not been filed in 2020 and 2021, returns for these years should be amended.

  1. Qualified Business Income Deduction

The Qualified Business Income Deduction allows for self-employed and small business owners to deduct up to 20% of qualified business income. Limits do apply for the business income credit and should be discussed with a qualified tax professional.

  1. FICA Tip Credit

General business tax credit for businesses that pay employees’ tips through payroll . The credit is 7.65% of total tips paid through payroll during the calendar year.

  1. Research and Development (R&D) Credit

The R&D credit is available for companies performing research, including breweries and other food industry organizations for performing activities related to the development, design, or improvement of products, processes, and formulas. The credit is a dollar-for-dollar cash savings each year.

  1. Capital Improvements

Section 179 expenses and bonus depreciation allows business owners to write off the full value of business assets all at once. Based on current rules (December 2022), bonus depreciation is reduced on 1/1/2023, and some changes for section 179 also take place.

  1. Additional Strategies

While conducting year-end reviews, restaurant owners should also consider:

  • Expense acceleration: The purchase of small items prior to January 1, 2023, to accelerate deductions
  • Missing deductions: Create a plan for the company to increase expenses and incentivize employees for business expenses incurred not reimbursed. The plan should be well documented and apply equally to all employees and restaurant owners. Example expenses include travel, home office, continuing education, supplies, and uniforms.
  • Employ children: Restaurants can earn $12,950 tax free if employed by business. The company receives a deduction for this expense and the child files but does not pay Federal Income Tax. The child employee must perform meaningful work, which for the food industry could be bussing, dish washing, or hosting.
  • Retirement planning: Look for opportunities to defer income by putting money in an Individual Retirement Account or company established plan.  Illinois requires many employers to have a retirement available for employees.
  • Current and future economic issues: While it’s impossible to see into the future, business owners should assess food and labor costs heading into 2023, based on significant increases in the prior year. Food and labor costs account for typically two-thirds of every dollar of a standard restaurant sale, therefore proper forecasting should be considered coming into the new year.
  • Labor wages: Restaurant owners should continue to follow national developments of hourly wage mandates to $15/hour as the new standard. Restaurants’ wages were still five percent below pre-pandemic employment levels, and the food industry has reported experiencing staff members not returning to previous positions with restaurants.

Looking ahead into 2023

While year-end planning should summarize the closing year, business owners should focus on the outlook of 2023. Commodity prices are decreasing, providing relief to budgets and supply chain issues. Coincidently, prices of food at home (from grocery stores) have increased at a higher rate than the price of meals outside of the home (restaurant), indicating consumers are willing to venture out to eat. Demographic trends also indicate younger generations – Gen Z – enjoy going out to eat, which provides a glimpse into traffic growth as they are willing to pay for restaurant experiences.

Understanding the upcoming or developing trends can help restaurant owners evolve their eatery into a more efficient business. In a post-pandemic economy, consumers have a rekindled appreciation for restaurants and now is the time to identify any changes needed. Issues that have been identified among the food industry include the cost structure of the business, closing underperforming units, how to streamline operations, embracing digital solutions and menu simplification. Completing a year-end review with a trusted accountant ensures business owners are informed of opportunities ahead of 2023 based on the previous year.