The past few months have been hard for all businesses, especially the restaurant business. They faced an unprecedented situation, and its effects will impact them for some time in the future. Paying taxes in such a situation can be quite stressful. However, there are ways through which you can minimize your taxable income.
With a tax expert by your side, you can plan your taxes as an ongoing process rather than let them burden you at the end of the year. Look at the list of reasons which make tax planning essential for restaurants in 2021.
Take Advantage of Government Relief Programs
The government has launched several programs, grants, and credits to help restaurant owners get through the pandemic. To understand which programs you qualify for, you need to have a tax planning professional alongside.
Employee Retention Credit (ERC):
If you have experienced a 50% drop in your total revenue in 2020, you can apply for the employee retention credit. This also applies if your restaurant was partially or fully closed due to a government order.
All the restaurants are eligible for it, especially the second condition. By doing this, you can get a refund of $5000 per employee. This credit is equal to the 50 percent of wages you paid to your employees.
Paycheck Protection Program (PPP) Loan Forgiveness:
When applying for the PPP loan forgiveness, you will need to carefully allocate the least amount to the PPP so that you can leverage the remaining wages for the ERC credit. If you claim all the wages you paid in your PPP loan forgiveness program, then you can’t use the wages for the ERC.
The minimum amount of payroll cost is 60 percent of the total loan amount, while the 40 percent can be used for other expenses. So, make sure you apply for ERC before applying for loan forgiveness.
Besides, there is a Restaurant Revitalization Fund (RRF) which is a tax-free grant equal to your revenue loss in 2020. This fund must be spent on qualified expenses over a stipulated period in 2021. Many states have also issued restaurant grants. You can benefit from these grants and get deductions when paying your taxes. This will require constant monitoring of government grants and tax planning, which is why hiring a professional will help immensely.
Plan Your Taxes Strategically
Most of these grants are treated as a non-taxable income by the federal government. So, make sure you have a tax expert with you to help you in treating these grants as such. For example, the Economic Injury Disaster Loan advance is considered non-taxable by the IRS. Still, if it is not accounted for correctly, it can be treated as a taxable income.
Claim Depreciation Bonus
You are eligible to get a 100 percent depreciation bonus deduction if the asset is placed in service. This means that you can write off leasehold improvement costs. It includes all kinds of improvements made to the interior of your property. This bonus depreciation can reduce your losses by offering you significant tax reductions.
The year 2020 was undoubtedly a challenging year, but one thing that brings some relief is the CARES Act. There are many tax implications of the Coronavirus Aid, Relief, and Economic Security (CARES) Act for small businesses. You can apply for your net operating loss from 2020 to income based on the past five years and get a refund. You can use this refund to get out from the losses you made.
Besides, the Tax Cuts and Jobs Act is another tax reform that affects the tax situation. All this makes tax planning essential. Funds from government grants and tax deductions can solve most of your problems. But you need to have a tax expert that can help you fully benefit from these programs.