Tax tips can save headaches and money
Peter Lancellotti is a franchisee of Seniors Helping Seniors in West Los Angeles. With 42 employees and a fast-growing business, he doesn’t have much time to look at arcane tax exemptions.
“I think if you want to spend 30 hours looking up how to do tax deductions, then have at it,” Lancellotti says. “I have no interest in learning that stuff. I’m a marketing guy.
But tax savings can pay off. Here are several areas that can save you money with the IRS.
Play good defense
David Oden is the president of Wichita, Kansas-based InfoSync, which handles accounting, payroll and reporting for 7,500 restaurants across the country. He says a good tax game starts with defense.
“It’s as much about avoiding a big surprise as making sure you take all the benefits you can.” Oden says.
Paul Arvanitis is a San Diego based healthcare administrator who owns three Doctors Express locations. He was caught off guard not by the big federal taxes, but the smaller local bills.
“The biggest thing, quite frankly, is the local taxes like the county tax or use tax,” Arvanitis says. “You pay shipping and taxes on your equipment. A year later you get a bill from the county. That county use tax was a bit of a surprise year to year to year.”
That’s why Oden says it’s crucial to program the right tax rates into your point-of-sale system when setting up a new location.
“For example with Alabama, there’s like four different local sales and use taxes that apply,” Oden says. “Sometimes it matters which side of some special district you’re on. A guy that’s reasonably close to where you are may not have to pay the same sales tax.”
Jeff Gibbs owns one Potbelly Subs location in Toledo, Ohio, and is opening a second one next spring. He says with employees from three or four different jurisdictions, calculating income tax rates was less than simple.
“The things that surprised me a little bit is the various local income taxes we had to account for,” Gibbs says. “Each one of them has their income tax rate, and some credit for city of Toledo taxes and some don’t.”
If you’re doing tax-exempt sales, make sure you get copies of the certificates. Otherwise, Oden says you’ll face consequences.
“If they aren’t there and you didn’t collect the tax, they’re going to charge you the tax,” Oden says. “Depending on what kind of business you’ve got it can be a lot of money.”
Of course, this depends on the business. Ohio doesn’t charge sales tax for meals that are delivered, only beverages, for example. So while Gibbs does two or three tax-exempt sales a week, he never collects certificates because he only does $20 a month of off-premises, tax-exempt beverage sales. “It’s such a low number it’s really not worth it,” Gibbs says.
Watch the little things
Repairs, maintenance, and construction bills can be taxed, depending on your jurisdiction. If you offer a free employee meal, you may be asked for sales tax on at least a portion of that benefit.
“When they have free employee meals, all but a handful will come in and ask you to remit sales tax on a portion of that sale,” Oden says.
Gibbs does half-price meals for his employees, which Oden says is fine, because the 50 percent subject to sales tax makes up for what the state would have received if it had taxed the suppliers for the products.
One tax break Gibbs took advantage of was bonus depreciation. But since the laws covering this can be complex, not everyone is up-to-date.
“I noticed there’s some recent changes in taxation,” Arvanitis says. “My accountant, I don’t recall him bringing that one up.”
There are three basic categories. For fixtures and equipment, you can deduct 50 percent of the value the first year and the rest over the next five or seven years (instead of deducting an even amount every year). For non-weight-bearing interior improvements like walls or doors, you can depreciate them over 15 years instead of 39 years. Finally, Section 179 bonus depreciation means you can deduct 100 percent of the value of new fixtures as long as you would have been profitable that year before the deduction.
Marshall Varano is a partner at Cohn Reznick, a New York City-based accounting firm that specializes in restaurants. He says as long as you’re buying $300,000 or less of equipment, Section 179 can help you get through that first year of operations.
“A restaurateur that has a couple of units that bought $300,000 of refrigerators, chairs, tables, that kind of stuff, he could actually write off 100 percent,” Varano says.
You can also get up to $9,600 of tax credit just for hiring workers in certain classes through the Work Opportunity Tax Credit.
“Mostly my restaurants qualify because there’s a low-income category,” Varano says. “If you’re hiring a lot of low-income folks there’s an opportunity.”
Gibbs says he’s benefitted from the law, but not to the point where it’s steered hiring decisions.
“We have taken advantage of that a couple of times over the years,” Gibbs says. But “I tend to hire the right person whether they would qualify or not.”
Certification was simpler because his payroll service, Greenwood Village, Colorado-based OnePoint, helped him.
You may qualify for this credit if you hire someone from these categories: unemployed or disabled veterans; TANF, SNAP or SSI recipients; ex-felons or those referred from vocational rehabilitation; certain people from empowerment zones or rural renewal counties.
Not everyone is getting benefits from this law. Arvanitis has a complicated financial situation due to healthcare laws in his state that precludes him from getting the bonus (he runs his business through a management company instead of owning a practice and hiring doctors directly). And Lancellotti, like many franchisees, hadn’t heard of it. When filling out forms for new employees, he simply skipped over the section on WOTC, but says he’ll talk to his HR provider about it.
“That is actually a page that I just never knew what to do with,” Lancellotti says. “I’m glad we had this conversation.”
There are a couple other areas to watch. Owners of sit-down restaurants often don’t realize they can get a FICA credit for tips that their employees report.
“I see that missed a lot of times," Varano says.
Another is the Section 199 deduction for domestic production. In the event you’re selling beyond your own front door, you can benefit from the “buy American” movement.
“It’s very complex and it takes a lot of time,” Varano says about tax time. “If you don’t have the ability or time to do that you want to get someone who does this all the time.”