Our next restaurant webinar, An IRS View of the Restaurant Industry, is May 21. This webinar will take a look at the IRS’ historical and current focus on the restaurant industry. Phil Hofmann and Adam Berebitsky will discuss IRS agents’ resources, issue resolution tools, and common restaurant examination issues. There will be time for audience questions. Click here to register.

The lawsuit filed against Visa, MasterCard, and several large banks challenged payment card interchange fees and merchant discount rules. A $7.25 billion settlement of this case won preliminary approval from a federal judge in 2012. The settlement is subject to final approval at a later date, but the judge’s decision allows plaintiffs to begin signing up more than 7 million retailers who may be eligible to participate. You may have received a notice recently informing you of the proposed settlement and explaining your rights and options.

The U.S. District Court judge made his ruling after considering arguments by retailers opposed to the deal. One of the groups disappointed with the proposed settlement is the National Restaurant Association. The organization has gone on record in strong opposition, recommending that merchants object to the settlement, opt out of the settlement, or both opt out and object to the proposed settlement. To learn why the National Restaurant Association opposes the deal, click here.

In addition to the options outlined above, you can also remain part of this settlement. If the court eventually approves the deal, and you do not exclude yourself from the lawsuit, you will have the opportunity to file a claim form. In discussions with outside consultants, we’ve been told that this settlement could provide claimants with approximately $272 per $1 million in transaction fees paid to Visa and MasterCard.

If you’re interested in staying part of the class settlement, merchants are encouraged by the class administrator to preregister. Preregistration is optional and does not affect your rights under the settlement. For more information, visit the official website of the Payment Card Interchange Fee Settlement or contact us at Restaurants@SSandG.com.

THE PROBLEM: The IRS pulled the affiliated company for an exam on its 2008 and 2009 tax returns. The IRS concluded the previous accountant did not classify each owner’s share of debt correctly on their respective K-1s. This error resulted in the owners taking losses (that should not have been taken) in tax years 2001 through 2009 against debt in which they were not personally liable. Based on the facts and the IRS code rules on loss recapture, it was determined the IRS could not force the taxpayers to include in current income the losses previously taken (erroneously) on their tax returns because the losses were outside of the three-year statute of limitations. The initial audit results were that the owners were required to pay tax as a result of the error in the three open tax years, plus penalties and interest.

To read this entire case study, click here.

SS&G’s Restaurant CFO Bootcamp is a three-day conference for finance and accounting professionals in the restaurant industry. Whether you are an experienced CFO or controller, or an accountant new to the industry, this seminar provides you with an interactive training experience.

The program delves into the hot topics every restaurant’s financial executive needs to know. We work with leading industry experts to discuss issues such as obtaining financing, compensation plans, tax updates, audit issues, restaurant valuation, and benchmarking.

Click here for event information and to register.

Overall same-store sales for fiscal year 2012 are up 2.5 percent, resulting from an increase in traffic and continued menu price increases. Same-store sales decreased since the third quarter of 2012 as the level of uncertainty increased for consumers with the presidential election and fiscal cliff looming. Quick-serve restaurants increased 4 percent with strong results from most companies. The upscale casual segment continues to recover with a 2.6 percent increase while the casual segment continues to experience modest yet positive improvement. Soft comparisons and recession fatigue are spurring positive comp sales. Chipotle continues to impress with an increase of 7.1 percent.

Cost of sales was flat as commodity prices continue to fluctuate from 2011. Proteins like beef and chicken have increased 9.9 percent and 11.3 percent, respectively. Wheat and cheese increased slightly during 2012. Many companies have increased menu prices to balance this out, and they continue to react through less discounting, lower labor costs (overall decrease of 0.1 percent), cost negotiations, menu engineering, and lowering other costs.

Click here to see results.

This is a tax on individual taxpayers; however, if you have passive investors in your operating entity, you’ll need to take the new 3.8 percent surtax into consideration.

Let’s look first at who is subject to this new provision and how it is calculated. The Medicare surtax will be imposed on Net Investment Income for individuals whose adjusted gross income is greater than a certain threshold: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for all others. The tax is 3.8 percent of the lesser of (1) Net Investment Income for the tax year, or (2) the excess of modified adjusted gross income for the tax year over the threshold amount.

Net Investment Income includes income from a trade or business that is a passive activity. So any individual who owns an operating restaurant company via a pass-through entity and who is considered a “passive” investor (not actively involved in the business) will be subject to the tax if his/her income is more than the income thresholds listed above.

Pass-through entities usually distribute cash to cover their owners’ tax liabilities. If you have passive investors in your operating entity, the new 3.8 percent surtax should be factored into the amount of cash that is distributed to cover the tax liabilities of all owners.

The WOTC was extended through Dec. 31, 2013, under the American Taxpayer Relief Act of 2012 for taxable employers hiring members of targeted groups and qualified tax-exempt organizations hiring qualified veterans. Employers needed additional time to satisfy compliance requirements since the WOTC was:

• extended retroactively for 2012 for members of targeted groups (other than qualified veterans)
• set to expire for qualified veterans hired after Dec. 31, 2012

As a result, the 28 day deadline period for employers to submit Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to designated local agencies has been extended. Now employers will be considered to have timely filed if a completed Form 8850 is submitted no later than April 29, 2013. This applies to the following groups of qualifying employees:

• Members of certain targeted groups hired on or after Jan. 1, 2012, and on or before March 31, 2013
• Qualified veterans hired on or after Jan. 1, 2013, and on or before March 31, 2013

As a welcome response, the IRS and the Treasury Department recently announced their acceptance of a request from the National Retail Federation and Retail Industry Leaders Association for guidance regarding the temporary tangible property regulations as they apply to remodels performed by restaurants and other retailers. Issuance will be in accordance with the IRS’ Industry Issue Resolution (IIR) program.

The IRS and the Treasury Department will work closely with industry groups in developing further parameters that would specifically address restaurant and other retail remodels. Guidance is expected in 2013 or early 2014 and will be independent of the final tangible property regulations anticipated for release in 2013.

Although not yet definitive, the regulations may include a more generous safe harbor for the computation of retail/restaurant remodeling expenditures as compared to the benefits currently provided under the temporary rules. Therefore, taxpayers considering making a change in the method of accounting for remodeling expenses on their 2012 tax returns may want to wait until additional directives or other similar guidance are provided.

SS&G will be monitoring the IIR project for its potential impact on restaurants and will provide updates as events unfold. Please contact your SS&G tax professional at Restaurants@SSandG.com for more information.

Phil brings more than 30 years of IRS experience, most recently as national food, beverage and hotel technical adviser. He retired from the organization in January 2013. He was a key member of task force teams dealing with specific industry issues including smallwares, tips, cost segregation, bonus depreciation, capitalization, vendor allowances, Work Opportunity Tax Credit, charitable contributions, retail remodels, and gift cards. He is a popular speaker and instructor, most notably for the National Restaurant Association and the American Institute of CPAs.

“Phil is one of the most astute, knowledgeable, and well-respected professionals in the restaurant industry,” says Gary Shamis, firm managing director. “We’re proud to welcome him as a resource and look forward to the opportunities to showcase his unique skillset to our clients.”

Phil is a graduate of Nebraska Wesleyan University with a Bachelor in Science in business administration. His bio can be found on our website.