You are here

Hospitality: Year-End Tax Planning Now Can Save You Significantly

May 22, 2017

With the passage of the PATH Act of 2015 (“The Act”) on December 18, 2015, Congress’ past inability to finalize tax legislation is not an issue this year. Business owners have had a full year to utilize many of the benefits created or extended by the PATH Act, and there still is time to make sure you have considered these beneficial provisions.

Business Incentives

  • Bonus depreciation provisions, for qualified new property additions, allow for immediate deduction (equal to 50 percent of the cost of qualifying property) for property purchased and placed in service between 2015 and 2017. After 2017, the bonus depreciation percentage goes down.  
  • Qualified Improvement Property (QIP) is a new category of bonus eligible property. QIP is an improvement to the interior of nonresidential real property if placed in service after the date the building was first placed in service (i.e. it does not contain the “3 year rule” that was included in the QLIP definition), and is eligible for bonus depreciation mentioned above. QIP does not include any improvement attributable to the enlargement of the building, any elevator/escalator, or the internal structural framework of the building (i.e. load-bearing walls/columns, floor slabs).
  • The QIP category is broader than the prior Qualified Leasehold Improvement Property (QLIP) category, which was limited to property constructed pursuant to a lease in a building that was three years or older. Under the prior bonus depreciation rules, bonus depreciation was not permitted for Qualified Restaurant Property (QRP) or Qualified Retail Improvement Property (QRIP).  The QIP definition is broad enough to include QRP, QRIP, and QLIP as well as other interior improvements that do not fit into those categories. That means that is now possible to have interior building improvements that are bonus eligible, but have a 39 year life.  This is significant because, prior to the QIP designation, capitalized improvements which were IRC sec. 1250 property in owner-occupied buildings or in common areas (un-leased space) were NOT bonus-eligible. Beginning in 2016, these 39-year assets are now bonus-eligible as QIP.  
  • The Act makes permanent prior law 15-year life for QLIP, QRP, and QRIP; such property must still meet the 3-year rule to qualify for 15-year life.
  • Enhanced Section 179 expensing provisions are now permanent and provide a current deduction of up to $500,000 on qualifying new or used property placed in service.  This provision includes expensing of up to $500,000 of qualified real property acquired after 2015 (limited to $250,000 prior to 12-31-15), as well as air conditioning and heating units acquired after 2015. This deduction is phased out once overall qualified asset purchases exceed $2M.
  • These two provisions significantly decrease the out of pocket cost for an operator with respect to 2016 build outs. Businesses should also consider the tax incentives available under IRC sec. 179D.  Section 179D allows taxpayers to expense currently costs related to projects that improve (based on standards contained in Treasury Department regulations) the energy efficiency of certain building components or systems. 


Repair and Capitalization Regulations

  • In September 2013, the IRS released final tangible property regulations (“repair regulations”).  These complicated regulations provide guidance on when taxpayers are required to capitalize costs related to tangible property and when they can currently deduct costs for acquiring, maintaining, repairing, and replacing tangible personal property.  These regulations apply to tax years beginning on or after January 1, 2014, but can be applied to 2012 and 2013 tax years as well. The IRS has provided certain safe harbor rules to help taxpayers more easily determine which repair and maintenance costs are deductible.  
  • One taxpayer friendly provision allows taxpayers in the retail and hospitality industries to use certain safe-harbor methodologies (simplifying conventions) to determine how much of their remodeling costs are currently deductible and how much should be capitalized.  
  • One other taxpayer friendly provision, contained in the repair regulations, requiring action prior to year end is the safe harbor de minimis expensing rule. This rule allows a taxpayer with audited financials to deduct the cost of up to $5000 per invoice or per item of new property additions ($2,500 if the taxpayer does not have audited financials).  To take advantage of this safe harbor provision for the 2017 tax year, the taxpayer must have had in place prior to January 1, 2017 a “written accounting” policy treating such costs below the threshold as a current deduction and must account for such items in accordance with this policy. To benefit from this provision for 2016, the policy should have been in place prior to January 1, 2016.


Tax Credits

  • The Work Opportunity Tax Credit (WOTC) provides a generous credit (average of $1,400 per employee) for the hiring of certain qualified individuals, and has been extended through December 31, 2019. Examples of such qualified individuals include employees receiving certain government benefits, supplemental social security income or long-term family assistance, and veterans. Generally, advanced certification is required to claim this credit and must be submitted within 28 days of start date. An extended certification period was allowed for hires from Jan. 1, 2015 through August 31, 2016. This one-time extension allowed taxpayers to certify hires during this period by September 28, 2016, instead of the normal 28-day period.
  • The Federal Insurance Contributions Act (FICA) tip credit is available to operators based on employee tips upon which social security has been paid. This credit is oftentimes missed in the industry, but can be claimed on an amended return.
  • As testament to the value of the FICA tip credit, Danny Meyer, CEO of Union Square Hospitality Group, announced that with the elimination of tipping at his full-service restaurants, the loss of the Federal FICA tip credit will cost him approximately $1M in federal credits.  We will see if other operators are willing to take a higher moral ground when faced with a similar increase in their income tax bill.
  • Although not typically applicable to the restaurant industry, the Research and Development (R&D) tax credit could provide up to a 20% credit for certain qualified expenses for development of new products, procedures, methodologies or technologies (i.e. test kitchens, development of new yeast strains or other technology).  
  • The Small Business Health Care Tax Credit is available to employers that pay for their employees’ health insurance. This credit has limited applicability to most companies and is phased out if a business has more than 25 full-time equivalent employees.
  • State enterprise zones, like the federal empowerment zones, provide tax incentives at the state level to businesses that operate in certain qualified areas. Businesses should contact their tax professional to determine if they operate in one of these zones.  


Other Tax Provisions Impacting the Hospitality Sector


  • If you operate your restaurant in an S corporation or LLC, it is important to review your tax basis prior to year end.  You need to ensure that your tax basis is sufficient to allow for deduction of any operating losses or tax credits generated in 2015. S corporation basis rules are more restrictive than those for an LLC, so confirm your CPA understands the intricacies of these rules.  
  • Also, the imposition of the 3.8% Medicare Tax on Net Investment Income (NII) applies to income from passive activities. You should review the tax characterization of your pass-through activities, if attempting to characterize them as non-passive, to determine if you are meeting the material participation rules.
  • Proposed IRS regulations will significantly impact the transfer of discounted minority business interests to family members. Under existing law, taxpayers have been able to discount intra-family transfers using “lack of control” and “lack of marketability” discounts. The proposed regulations, which could become effective in December of 2016, would limit the ability to utilize these discounts when transferring business interests to family members; it also includes a three-year look-back rule, which would include transfers occurring within three years of death in the transferor’s estate. Taxpayers considering intra-family transfers of minority business interests may want to act now to take advantage of existing law.
  • For many restaurants, gift cards can be a significant part of the business. Understanding and complying with gift card escheat rules is important, and each state has different rules regarding gift cards.  
  • Operators should determine if they qualify for potential one- or two-year deferral of gift card revenue and whether they have complied with the appropriate tax return disclosures.
  • Implementation of the Affordable Care Act (ACA) provisions (Obama Care) were effective in 2015 for employers with 100 or more full-time employees and delayed until 2016 for those with 50 or more full-time employees. Most companies have probably already analyzed the impact of these provisions. It is still unknown whether the 30-hour per week threshold will be increased to 40 hours, or if the ACA will be repealed by future administrations. Confirm that your payroll processing company will deal with the information reporting requirements imposed by the ACA.
  • If your company provides Health Reimbursement Arrangements (HRA), the IRS has determined these arrangements are employer payment plans considered to be group plans subject to the ACA market reform provisions. Failure to comply with these provisions could subject the company to an excise tax pursuant to IRC Code Sec. 4980D. IRS Notice 2015-17 provides some relief from the excise tax if you are considered a “Qualified Small Employer”, but this exception expired after June 30, 2015.
  • In 2014, mandatory tips were no longer considered tips for purposes of IRS Form 8027 or Form 8846 FICA tip credit. Moving forward, these monies will need to be treated as wages to the server. As such, they will not be eligible for the FICA tip credit, even if they are distributed to the server like a normal tip. For a tip not to be considered a mandatory service charge, it must be made free from compulsion. Additionally, the customer must have unrestricted right to determine the amount, the payment should not be the subject of negotiation or dictated by employer policy, and the customer has the right to determine who receives the payment.  
  • It is also possible that your state may consider such mandatory tips or service charges as part of the sale of food and subject these amounts to sales tax. If this is the case, you may instead want to provide a suggested tip schedule on the bill and allow the customer to determine the actual tip, thus avoiding this provision.
  • Some restaurants now charge customers “reservation or no show fees.” Sales tax treatment on these fees may vary by state.  
  • When financing for expansion exceeds an operator’s cash flow resources, the operator can use “friends and family,” traditional bank lending sources, private equity investment, or sources to secure the resources needed.
  • The EB-5 program is similar to debt financing (i.e. you don’t have to give up ownership or control), but at possibly lower interest rates. EB-5 applicants must make either a $500K or $1M investment, and the restaurant operator must provide at least 10 full-time jobs for qualifying workers over a two period in a qualifying geographic area. There is a rigorous application process and additional transaction costs.  However, for some operators, this program has appeal.


What Does CohnReznick Think?

With competition from other concepts, lower grocery prices, increasing labor and occupancy costs, and local and federal tax rates on the rise, an operator must do everything possible to maximize the bottom line. Many of the points covered here can provide significant savings without altering the culture of your restaurant. As you prepare for year-end, now is the time to address these issues that could impact your restaurant for years to come.



Brian Gershen, CPA,
Partner at CohnReznick

For more information, visit