We all know this has been a year like no other for the restaurant industry. The pandemic caused closures, both temporarily and permanently, for too many establishments. But if you were able to keep your doors open, there are many tax savings opportunities, some which are quite common and others that are not as clear and therefore are underutilized. Below are four that are unique for 2020 along with three long-standing tax tips that should be considered as you prepare your year-end documentation.
1. PPP Loan Forgiveness. If you have received PPP loan forgiveness, or if loan forgiveness “is reasonably expected to occur,” you cannot deduct the related expenses in 2020. If the business has incurred all of the needed expenses before the end of the PPP covered period, they should “reasonably expect” that the PPP loan amount will be forgiven. Therefore, those related expenses will not be eligible tax deductions in 2020. However, if your business expects that all, or part of, the loan will not be forgiven, there is a Safe Harbor procedure that can be used to claim the unforgiven portion of those expenses on your 2020 income tax return.
2. Families First Coronavirus Response Act allows employers to provide employees with Paid Sick Leave (PSL) or Emergency Family and Medical Leave (EFML) for specified reasons related to COVID-19. This is applicable to employers with less than 500 employees. PSL or EFML can be taken from April 1 to December 31, 2020 up to 80 hours in connection with COVID-19 and up to 12 weeks of job protected leave respectively.
3. Employee Retention Tax Credit. This provision of CARES Act is intended to help businesses keep employees on their payroll during the downturn caused by COVID-19. Employers whose operations were fully or partially suspended or whose gross receipts declined by 50 percent are eligible to claim this credit. However, you will not be eligible for this credit if you have availed PPP.
4. Donations count. When you donate fresh or cooked food to public charitable organizations, you are eligible for a general deduction equal to your cost basis, and an enhanced deduction if you meet all of the specified conditions in IRS Pub.526. You may deduct up to 25 percent of taxable income for food donations under the CARES Act for 2020 as enhanced deduction. This will reduce your tax bill and also build your goodwill.
5. Make sure to pay your spouse and children who work at the restaurant. Restaurant cultures lend themselves to having family members help when needed but there is no line-item for “love” on the IRS tax form. If you have children under the age of 18 who have helped you in your business this year, pay them on a W-2. The child won’t owe federal income taxes if the wages are less than $12,400 and both parent and child are exempt from payroll taxes. Pay reasonable wages, use timesheets and document everything thoroughly. Pay them through your sole proprietor or a family management company if you own an S-Corp. If your spouse assists you in your business, pay enough salary that is sufficient to contribute to the maximum amount allowable to a 401(k), including an employer match.
6. Make business investments scheduled for next year now. Buy and put to use before December 31, all new restaurant purchases in 2020 and get a 100 percent deduction by way of bonus depreciation on the cost. This includes machinery, equipment, computers, furniture, qualifying vehicles, etc. The icing on the cake is increased limits of Sec 179 expensing which is $1,040,000 for 2020.
7. Mileage matters. As many restaurants were only able to operate as takeout or delivery, mileage deductions can make a real difference. For 2020, the mileage deduction is 57.5 cents per mile. Maintain a mileage log which correctly and distinctly records the business miles for all of your offsite food deliveries.
Anil Grandhi is Founder & CEO of Seattle-headquartered AG FinTax, providing expertise and guidance to restaurant owners and operators, entrepreneurs and small businesses nationwide on tax planning, CFO services, wealth management, and the PPP loan forgiveness process. He can be reached at firstname.lastname@example.org