Publication: KROST Monthly News Release
Running a business can be extremely difficult with income taxes often eating up a good portion of your profits. There are, however, numerous tax benefits available to businesses that most owners are unaware of. As a restaurant owner, you are probably aware that you have to pay social security and Medicare tax on employee tips reported. However, do you realize that you can also take tax credits for the amount paid? Or that you may be entitled to various tax credits and deductions for locating your restaurant in economically distressed areas? How about credits that are available for hiring employees from certain target groups?
While tax laws are usually complicated, here is a brief and simple introduction to some of the employment-related credits and deductions that you can benefit from:
- Credit for Employer-Paid Social Security and Medicare Taxes on Employee Tips
Employers in food and beverage business may claim a dollar-for-dollar federal income tax credit for social security and Medicare taxes paid or incurred on certain employees’ tips. Credit is allowed only if the tipping of employees is customary. Therefore, fast food restaurants or operations such as cafeterias where tipping is not customary may not qualify.
- Welfare-to-Work Credit
Businesses that hire long-term family assistance may claim a credit on qualified wages paid in the first two years of employment. This credit is calculated as a percentage of wages paid each year for up to a total of $8,500 for two years. However, since the credit is not available for employees who are hired after 2005, only credits calculated on the second year’s wages are available for 2006 (if you pay wages to qualified employees who started working for you in 2005).
To stimulate growth and development, both federal and California state governments have selected certain areas where different tax incentives are allowed for businesses operating within these parameters. Each zoning designation has a different expiration date, so you might have to act fast to get the most benefit out of these credits. Here are some of the incentives that are available in various designated zones:
Federal Empowerment Zone
- Employment Credit
Employers may claim credit on wages paid to qualified zone employees who live and work in the same Empowerment Zone. The credit can be as much as $3,000 per employee each year.
- Increased Section 179 Deduction
Internal Revenue Code Section 179 allows businesses to choose to deduct all or part of the costs of certain qualifying property in the year the property is placed in service up to a certain limit. Qualified businesses located within an Empowerment Zone may be able to claim an increase in the Section 179 deduction by as much as $35,000 on qualified zone property used in an Empowerment Zone.
- Defer Gain on Sale of Assets
When a qualified Empowerment Zone asset is sold and a qualified replacement property is purchased in the same zone within 60 days, election can be made to defer part or all of the gain. The gain is deferred until the sale of the replacement property by reducing the basis of the replacement property.
Federal Renewal Communities
- Employment Credit
Employers may claim credit on wages paid to qualified employees who live and work in the same Renewal Communities. The credit can be as much as $1,500 per qualified employee each year.
- Increase Section 179 Deduction
Similar to Empowerment Zone business, a qualified Renewal Community business is also eligible to claim an increase in the Section 179 deduction by as much as $35,000 on qualified renewal property used in a Renewal Community.
- Capital Gain Exclusion
When a qualified community asset held for over five years is sold, the qualified capital gain from the sales can be excluded from the gross income of businesses operating in a Renewal Community.
- Commercial Revitalization Deduction
Every year until 2009, each state authorizes a group to act as a community revitalization agency to allocate up to $12 million of commercial revitalization expenditure amounts to each renewal community. Businesses who receive a revitalization allocation from a state agency can elect to either deduct half of any qualified revitalization expenditures in the first year, or amortize all the expenditures over a 120-month period–which is much shorter than the regular 39-year depreciable term for commercial buildings.
California Enterprise Zones
- Hiring Credit
Businesses operating within an Enterprise Zone may claim hiring credits for wages paid to qualified employees. Individuals, estates, trusts, partnerships and corporations may claim credit calculated at 10%-50% of the qualified wages paid throughout the first sixty months of employment for each qualified employee. S Corporations can take 1/3 of the credit amount on entity level against the 1.5% state tax while the shareholders get a pass-through credit for the entire amount, creating credit benefits up to 133%.
- Sales or Use Tax Credit
Businesses operating within Enterprise Zones may claim sales or use tax credit on qualified property purchased and used exclusively within Enterprise Zones. Individuals, estates, trusts, and partnerships may claim an annual credit equal to the sales or use tax paid to purchase the first $1 million of qualified property. Corporations and S Corporations may claim an annual credit equal to the sales or use tax paid to purchase the first $20 million and $1 million of qualified property, respectively. S Corporations can take 1/3 of the credit amount on entity level against the 1.5% state tax while the shareholders get a pass-through credit for the entire amount, creating credit benefits up to 133%.
- Business Expense Deduction
Businesses operating within an Enterprise Zone can elect to take a current year deduction on 40% of eligible costs of qualified property purchased and used within the Zone. The remaining costs can then be depreciated over the depreciable term.
Tax laws are very complex thus it is impossible to cover all the details in just one article. Professional advice is strongly recommended. With the correct guidance, record-keeping, and compliance effort, you can benefit tremendously from these tax saving opportunities.
This article represents a general overview of some of the many tax incentives available and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. This article was not intended or written to be used, and cannot be used, by anyone for the purpose of avoiding penalties; furthermore, this was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.
About the Author
So Sum Lee, CPA, Principal
Tax, Real Estate, Technology, Hospitality
So Sum Lee, CPA is a Tax Principal at KROST. So Sum has over 18 years of experience in public accounting and has a wide range of experience in Taxation, as well as servicing high-net-worth clients. So Sum’s area of expertise includes industries such as wholesale, Real Estate investments, and Restaurants. » Full Bio