Five Ways to Combat Tax Reporting Errors in the Restaurant Industry
posted Mar 17, 2017 by Leigea Landry, CPA, MST in the Business Blog
Restaurant owners, operators and CFOs often run into problems when they believe in misconceptions about their tax responsibilities. Keeping detailed records and maintaining tips is the basis for diligent tax reporting.
5 Common Myths
Only 8% of tips need to be reported by my tipped employees, not their total tips earned, correct?
- Tipped employees are expected to report the full amount of their tips received. Only for tip allocation purposes is the 8% rate used, which gets reported on Form 8027. It is also important to note low reporting percentages may trigger an IRS tip audit.
In calculating the FICA tip credit on my federal tax return, am I required to use the current federal minimum wage of $7.25?
- Computing the FICA tip credit is based on Congress’ fixed minimum wage of $5.15 per hour, meaning that employers are able to maximize eligible tips and the value of the credit. A more substantial credit will result from this because, unlike the $7.25 wage, fewer tips are needed to bring cash wages to $5.15.
When I dine at competitors’ restaurants, it is considered research and therefore the money spent is fully deductible, right?
- Actually, the IRS only treats 50% of the purchase deductible for tax purposes since the “research” cost is considered a meal and entertainment expense.
Can I expense the discount of the sale of a holiday gift card with an incentive attached?
- Let’s say as an incentive, a restaurant offers a complimentary gift card with a purchase at their establishment. When the gift card is sold, the discount expense is deductible only in the tax year in which the card is redeemed.
- Until a gift card is redeemed, I can defer the revenue from the gift card sale, right?
Actually, reporting taxable income from gift cards can be done by one of three approved IRS methods in accordance with financial statement accounting methods:
- Cash basis method: On the tax return, income is reported in the year of the gift card sale.
- One-year deferral method: Income is documented at the earlier of either the redemption of the gift card or one taxable year after the gift card sale.
- Two-year deferral method: Revenue recognition may be at the earlier of either the redemption of the gift card or within two taxable years after the gift card sale.
For more information on tax reporting requirements in the restaurant industry, contact any member of our Hospitality Services Group.