Restaurateurs Get Some Tax Breaks

New Tax Bills Help Hospitality Industry

by Robert Wagner, CPA

As the saying goes, even a blind pig will find an acorn every once in a while. After four years of rooting around, Congress finally came up with some acorns worthy of note. These little morsels were passed as part of the tax bills signed by the President in August, 1996. Following are some significant provisions affecting the hospitality industry:

Tip Credit Changed Retroactively

The tip credit is changed retroactively to make it easier to claim the credit. The credit allows restaurateurs to take a tax credit on the employer portion of FICA taxes paid on server tips. The IRS has always contended that the credit is allowed only on tips actually reported by servers. That way when the IRS audits a restaurant and assesses back taxes on unreported tips, the tax payments don’t qualify for the tip credit.

Now the tables have turned. This is extraordinarily important for companies that have gone through an IRS tip audit. Such taxpayers may be due a refund of taxes paid.

There are three things you should know about the “new” tip credit:

1. The law change is effective for all tax years after 1993.
2. The credit now applies to ANY tax paid on tips whether or not the tips were reported by servers.
3. The tip credit is permitted regardless of when the tips were earned.

Here’s an example. Say you are a taxpayer that underwent a tip audit for tips reported in 1991 and 1992. Assume the bill you got from the IRS was $50,000 which you paid in 1994. You may qualify for a tax refund for the entire $50,000 by filing an amended 1994 tax return. So, if you underwent a tip audit or paid tax on an “employer-only” tax bill, contact your tax professional for advise on getting a refund.

Effect on Future Years

In addition, this tax provision means that the IRS has a diminished incentive to spend limited resources auditing server tips. That’s because the restaurant will get a tax credit for any additional tax it pays the IRS. At question is whether more restaurants now will refuse to participate in the TRAC (tip rate alternative commitment) tip initiative program that the IRS started in 1995.

Attorney Tracy Power of Power & Coleman in Washington (Phone 703-841-1330) is a national expert on restaurant tax law. She anticipates that restaurateurs will be less enthusiastic about TRAC but will still sign up. She reasons that the IRS can always threaten a tip audit and restaurateurs will choose to avoid the time and expense of an IRS audit. They will simply sign the TRAC agreement. According to Ms. Power, “Signing the TRAC won’t cost the restaurateur anything.”

Work Opportunity Credit

The old Targeted Jobs Tax Credit is back as the new Work Opportunity Credit. This tax credit is particularly attractive to larger restaurant operators and quick-serve chains. For each new qualifying employee, the taxpayer can receive up to $2,100 in tax credits. To ease the burden of compliance, private firms will handle the paperwork in exchange for a percentage of the credit they find for the restaurateur. The tax credit is particularly attractive to restaurateurs employing more than 200 to 300 employees.

S Corporation Reform

Thousands of restaurants have chosen to be taxed as S corporations. Numerous changes to the S corporation laws generally will take effect beginning 1997. Of significance to the restaurant industry is the provision allowing S corporations to hold subsidiary companies.

Restaurateurs with two or more restaurants should examine whether to establish a holding company with the individual restaurants as subsidiaries. This arrangement does three things:

1. Preserves the limited liability of each restaurant in the group.
2. Allows for transfers between and among sister and parent companies without the need to justify the transfers to the IRS.
3. Saves on income tax filing fees -- the parent and subsidiary companies may qualify to file a single tax return.

Perhaps the greatest benefit is the that the parent/subsidiary relationship will finally reflect how a number of restaurants under common ownership actually operate on a day-to-day basis.

Robert Wagner is a principal in Robert Wagner & Company, LLC, CPAs. The firm provides tax and accounting services to restaurants, bars and hotels. He can be reached at 404-874-7000, fax 404-874-1132, email: rwagner@bellsouth.net.