Action Items D.C. Metropolitan Restaurant Owners Should Take Before Year-End

November 30, 2022

As 2022 is coming near a close, it is time for restaurant owners in the Washington D.C. metropolitan area to begin thinking about 2022’s taxes as well as business practices that should be implemented in 2023. Below are items local restaurant owners should take into consideration before year-end.

Take Advantage of Tax Depreciation Incentives

Fixed assets that are purchased and placed into service by restaurant owners before the end of the year could qualify for a accelerated first year federal tax deduction. To the extent restaurant owners have taxable income in 2022, up to $1,080,000 of deductions under IRS Section 179 would enable restaurant owners to deduct the full cost of fixed assets acquired and placed into service which includes machinery and equipment, point of sale systems, furniture, and fixtures, and qualified improvements.

Bonus depreciation is also available and allows restaurant owners to deduct 100% of the cost for fixed assets acquired and placed into service. Bonus depreciation is not contingent upon whether a restaurant owner has taxable income and there is no limitation on the amount of bonus depreciation that can be claimed. While bonus depreciation applies to the same types of fixed assets under Section 179, qualified improvements placed into service must be brand new or original-use property. Bonus depreciation is scheduled to be reduced from a 100% deduction to 80% beginning in 2023.

Donate Unused Food Inventory

Restaurants owners that have a large amount of useable food waste should consider donating the food inventory to a charitable organization and qualifying for an enhanced charitable deduction. The enhanced charitable deduction is equal to the lesser of:

  • Twice what you paid for the donated food, or:
  • The cost of the donated food or plus half of expected profit margin if sold at market value

If the enhanced food donation is claimed, restaurant owners must reduced their cost of goods sold by the original purchase price of the food that’s being donated. Another item to consider is the deductibility of food contributions are limited to 15% of the restaurant’s net income; any un-used charitable deductions carryforward up to 5 years.

Consider State PTE Tax Elections

In recent years, many states are allowing pass-through entities (PTE) to elect to have the state taxes paid at the entity level as opposed to passing the liabilities to the owner(s) of the PTE. Many states are implementing this to allow owners a federal tax deduction for state tax payments made on their share of the pass-through income; this is proving to be a workaround to the current the $10,000 federal state and local tax deduction limitation at the owner level.

In the D.C. metropolitan area, Maryland offers a PTE election that’s been available since tax year 2020 while tax year 2022 will be the first year that Virginia will implement a PTE election.

Determine How D.C. Initiative 82 Will Impact Your Restaurant Operations Next Year

On November 8, 2022, D.C. passed Initiative Measure 82 which will gradually phase out the tip credit D.C. tipped wage workers are paid by 2027.The phaseout will begin in 2023 thus increasing the amount of the hourly wages that D.C. restaurant owners will be responsible for.

D.C. restaurant owners will need to consider how they will fund their employees’ new wages starting next year whether that’s by increasing menu prices or inserting automatic gratuities or service charges to the customers’ bills. Should restaurant owners decide to transition towards an automatic gratuity or service charge model, restaurant owners need to strongly consider the impact could have on FICA Tip Credits that are possibly being claimed.

Ensure You Apply for Employee Retention Tax Credits If Eligible

Most restaurants owners are qualified and have already applied for employee retention tax credits.  While these credits are only applicable for tax years 2020 and 2021, there is still time for restaurant owners to go back and put in for these refund claims if they haven’t done so already. The opportunity to apply for these credits for tax year 2020 will begin to expire in 2023.

See if Your Restaurant Qualifies for the Work Opportunity Tax Credit

As restaurant owners were beginning to hire back workers as the pandemic calmed down, many workers from targeted group with historical barriers to employment were hired. As a result, restaurant owners may be eligible for the Work Opportunity Tax Credit.

Most eligible restaurants will receive a maximum a Federal $2,400 tax credit per person; the tax credit generally equals 40% of the first $6,000 wages that’s paid to an eligible person that’s worked at least 120 hours during their first year of employment.

Take Advantage of D.C.’s Small Business Retail Credit If Eligible

Restaurant owners in D.C. could be eligible for D.C.’s Small Retailer Property Tax Relief Credit. This refundable D.C. franchise tax credit is available to D.C. restaurants that have less than $2.5 million in gross receipts and that own or lease their D.C. business location. The credit is equal to the lesser of 10% of the total rent or property taxes paid or $5,000.

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