Tax Changes to Help Restaurants Free Up Cash Flow Amid Coronavirus
Exploring Restaurant Tax Credits and Incentives
By James Bailey, CPA
Tax credits are available to restaurants in the Families First Coronavirus Response Act, and tax deferrals, options for refunds, and more credits are available in the CARES Act. There are also delayed deadlines. If you’re overwhelmed with all the tax changes and how you can use them to your advantage, you’re not alone. Following is a list of important tax changes that every restaurant owner should be aware of.
Remember all the way back to the end of March? It already seems like a lifetime ago, but the Families First Coronavirus Response Act (FFCRA), which implemented nationwide paid leave policies, gave businesses a major incentive to allow their employees time at home to deal with the coronavirus. And the CARES Act, which passed a short time later, implemented a few short-term remedies in the tax code to help taxpayers free up cash flow and fixed another very important piece of tax law that was changed in the 2017 Tax Cuts and Jobs Act.
These are the tax changes that can help your restaurant save on money now, and potentially get back more money later:
- Delayed Filing Deadline
- Net Operating Loss (NOL) Carrybacks
- Qualified Improvement Property
- Employee Retention Credit
- Paid Sick Leave Credit
- Payroll Tax Deferment
- Work Opportunity Tax Credit
- Business Interruption Insurance
Delayed Filing Deadline
Keep this in mind as you’re reading the other tax updates, because an extended due date of July 15 to file 2019 state and federal taxes means an extended opportunity to claim tax credits and deductions. The extension is also a way to keep money in your bank account now, versus paying taxes right now. Along with the filing deadline extension, there is no interest or penalties on taxes owed. The due date to file estimated taxes for the first and second quarters is also delayed to July 15.
Net operating loss (NOL) carrybacks, which allow businesses to apply current losses to previous years’ tax returns and receive refunds for the taxes they paid for profits in those years, were eliminated by the Tax Cuts and Jobs Act (TCJA) of 2017. However, Congress temporarily restored carrybacks in the CARES Act and applied them to 2018, 2019, and 2020 tax years to create a cash infusion for businesses hit hard by COVID-19-related losses.
The NOL provision allows businesses to “look back” – or apply losses incurred in 2018, 2019, or 2020 – to the previous five tax years. Therefore, businesses that experienced a loss in 2018 may look back as far as 2013 to recoup taxes paid.
Tip: If your restaurant didn’t experience losses in 2018 or 2019, but you expect to in 2020 due to the coronavirus, talk to your CPA about adjusting estimated quarterly income tax payments.
Qualified Improvement Property
Did your restaurant remodel, expand, or otherwise make improvements to the interior anytime in 2018, 2019, or in 2020 before the coronavirus hit? If you did, and if your restaurant was already in service before these updates took place, you may be able to claim an immediate write-off of the improvement property. It’s retroactive to 2018, which creates the possibility for a tax refund. Exceptions are any expenditure to enlarge a building, elevators or escalators, or internal structural framework.
Employee Retention Credit
If you’re forced to shut down your restaurant or your total sales are down by half compared to the previous period, you’re eligible for the Employee Retention Credit. You can take a 50 percent credit against the first $10,000 in wages paid to employees, on a quarterly basis, with a maximum benefit of $5,000 per employee. Plus, you don’t have to keep employees on the payroll while you’re closed or only doing a portion of sales.
Click here to read an example of how a restaurant could use the Employee Retention Credit.
Paid Sick Leave Credits
If you offer paid sick or family leave to your restaurant employees related to COVID-19, you can claim up to 100 percent of paid leave wages for each quarter. The credit is taken against your employer portion of Social Security taxes. A 100 percent tax credit applies to your worker, and a lesser credit still applies if they take paid leave for a family member. Paid leave credits are covered under the Families First Coronavirus Response Act.
Payroll Tax Deferment
Restaurants can defer the employer portion of Social Security taxes. The eligibility period is between March 27 and December 31, 2020. There are exceptions for businesses that received PPP loan funds that are later forgiven. This is in addition to paid leave credits through the Families First Coronavirus Relief Act.
Deferred taxes must be deposited by December 31, 2021, for the first 50 percent of the deferred amount, and December 31, 2022, for the remaining 50 percent.
Work Opportunity Tax Credit
Restaurant owners who can hire veterans, SNAP and SSI recipients, individuals unemployed for at least six months, and others can qualify for the Work Opportunity Tax Credit for each eligible hire. The tax credit is available for up to 25 percent of the total wages during the first year of employment, which could result in a possible maximum of up to $9,600 per employee.
Business Interruption Insurance
Another option to consider as a possible source of cash flow is business interruption insurance proceeds. If you have coverage for this, you should be filing a claim with your insurance agent now.
None of these tax changes will matter much if you don’t know how to claim them or have trouble figuring out how to account for the various credits and deferrals as part of a larger tax and cash flow strategy. Business is far from normal right now, but the time to plan for the rest of the year is now. Let us help your restaurant apply for every tax credit you’re entitled to so we can help you get more money back in your bank account. Contact us to get started.