Many of you were scrambling last year to understand the plethora of relief programs and tax benefits available while trying to pivot your business models to stay profitable during a time when all odds were against you. We commend you, but we also understand that you’re probably overloaded with information that you might not understand. Therefore, I want to summarize everything that you should be doing now to ensure you’re taking advantage of tax incentives and relief programs for restaurants. This is a 5-minute read that could potentially earn you hundreds of thousands of dollars depending on the size of your operation. I think it’s worth it. These steps were so effective that we were asked by Touchbistro POS to publish an article for its users, which I highly recommend reading in addition to this.
Take Advantage of All Government Relief Programs and Grants
Believe it or not, you could achieve profitability for 2020 even if you were partially shut down just by participating in the PPP and ERC programs. Here’s what you should be doing now for each of these programs:
ERC 1: You can now retroactively apply for the employee retention credit if you experienced a 50% drop in revenue in 2020 or if your operations were partially or fully suspended due to a government order. Almost all restaurants qualify, especially for the latter. This could put up to $5000 in your pocket per employee for 2020. If you have 10 employees, that’s $50k easy money. Before you apply, read the remainder of this article because there are implications. More on this here.
PPP 1: apply for forgiveness by strategically allocating wages between ERC 1 and PPP 1 so you’re fully leveraging every penny spent on payroll. Many borrowers are claiming all the wages they paid during their PPP covered period when applying for forgiveness, and this is disallowing them to use these wages for the ERC. Be careful here!
ERC 2: Starting Jan 2021, the ERC has been beefed up to provide you with $7k per employee per quarter as long as you experienced a 20% loss in revenue compared to 2019. If you employ 10 people, that’s $70k easy money. More on this here. Unless you really need the cash, I recommend applying for the ERC 2 after your PPP 2 covered period has ended so again you can strategically allocate wages between ERC 2 and PPP 2 loan forgiveness.
PPP2: If you experienced a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019, then you should apply for the second round of PPP. When applying make sure you’re requesting 3.5x your monthly payroll (inflated amount for restaurants), not 2.5x. More on this here. Apply for PPP 2 forgiveness and ERC 2 in tandem as mentioned above.
Restaurant Revitalization Fund (RRF) Grant: You can receive a tax-free grant amount equal to your 2020 revenue loss, which must be spent on qualified expenses over a covered period in 2021. The application for the RRF grant is expected to be released by the SBA at the beginning of April. More info here.
Restaurant grants: There are numerous grants being issued by state governments, private companies, restaurant vendors, and others to help restaurants get through the pandemic. You should constantly monitor your state’s restaurant association website to see if there are grants for which you qualify (I promise you there are). You can start with our relief tracker which has been updated daily since March 2020.
File your 2020 Taxes Strategically
File your 2020 Taxes Strategically so that you’re taking advantage of the losses you incurred in 2020. You don’t know what you don’t know, especially when it comes to tax planning. So, I will try to break this down into 4 easy steps in the same order which you should follow. Feel free to share this with your accountant to ensure they’re following this methodology. Note: the order is very important because if you don’t follow this order you could be barred from claiming these benefits.
- Claim the ERC 1, reduce your 2020 wages by the ERC amount.
- File for PPP 1 loan forgiveness before filing 2020 tax returns so you can claim tax-exempt income on your 2020 returns to get tax basis to claim losses.
- Prepare your 2020 tax returns
- Many grants are being treated as nontaxable income for Federal tax purposes, so make sure your accountant is properly reviewing your general ledger and treating these grants as such. For example, EIDL advance is considered nontaxable by the IRS, but this could easily get picked up as taxable income if not accounted for correctly.
- FFCRA tax credits must be treated as other income, not a reduction in wages deductions, make sure to back these out.
- Some states are not recognizing PPP expenses as deductible for state tax purposes, or they’re treating PPP forgiveness as taxable income. Your accountant should double-check the rules for your state.
- Claim 100% bonus depreciation for leasehold improvements
- Leverage the enhanced inventory donation deduction
- Carry back the 2020 losses to claim a refund in pre-2020 tax years.
There it is, you could potentially get a refund for taxes you paid back to 2015 depending on the amount of your 2020 losses. I am sure you can use the cash!
Set up Appropriate Recordkeeping and Internal Controls Protocols
By far the most overlooked area in restaurant finance is the reconciliation of all moving parts such as the POS, delivery services, payroll, tips, and cash deposits to ensure there is no theft, errors, or waste. This typically happens when owners/operators try to cut bookkeeping costs or avoid adapting to new tech, then end up paying double what they would have paid through tax penalties, theft, excessive food/labor costs, and mismanagement. If you didn’t implement cutting-edge systems and procedures to manage recordkeeping and internal controls, then DO IT NOW.
Here’s a simple example of the damage this could cause (based on a real-life experience with a client we inherited from another accountant): The bookkeeper/accountant doesn’t fully reconcile bank deposits with tenders in the POS from Ubereats so they could cut down on their bookkeeping time and make owners happy about the cheap bookkeeping service they offer. The problem is that beginning in October, Ubereats began remitting sales tax on the restaurant’s behalf. Ultimately, this led to incorrect sales tax returns (thus thousands of dollars in sales tax overpayments) and errors claimed by the delivery service that was not verified (equaling hundreds of dollars per month). Luckily, the next accountant identified the issue, but the restaurant still had to pay them to go back and fix months of sales tax returns and accounting and reissue all of their financial statements to investors. Don’t skimp out on accounting!
Monitor Your Food and Labor Cost
You’re probably already doing this, but if you’re not, then you should know that this is mandatory. If you’re not ensuring your prime costs are on par with [at minimum] industry standards on a weekly basis, then you’re losing money every day, thousands and thousands of dollars. Make sure you have the appropriate systems and templates in place to be able to manage this. I wrote this short article a couple of years ago that outlines how you can increase profit in your restaurant by simply having a proper accounting and bookkeeping system around reviewing, verifying, and paying bills. I highly recommend you read it.
Run Leaner Than Ever
Set up a savings account and call it “Profit Savings”. At the end of each week transfer 10% of your sales into this account. Never touch this account and keep it as your distributions or reinvestment fund. This will force you to work with the cash you have after separating what your profit should be so that you can manage your spending like a real restaurant. If you’re already at a 10% net profit on your sales, then transfer 12% instead, you get the idea. I believe restaurants should always be aiming to outdo the status quo (without affecting their quality obviously).
Upgrade your POS and Payroll System
Upgrade your POS and payroll system to web-based systems like Toast and Run by ADP respectively.
Many of the web-based POS systems have an integrated seamless delivery platform that will allow you to offer delivery without paying crazy fees to you know who. If you’re not offering delivery, then start offering it immediately, it is here to stay whether you like it or not. Look into offering family meals as part of this!
The competence and accessibility of a payroll provider are very important as you probably noticed when PPP was introduced. Make sure you’re using a qualified provider that is updating their platform to support regulation changes and integrate with your accounting system. Remember, investing in automation and systems is how you can cut accounting and bookkeeping costs, not hiring the cheapest person.
Implement Systems That Allow You to Assess Business Unit Profitability and Performance
Quality systems streamline processes, which became evident during the pandemic when restaurants had to operate with a significant drop in employees.
After you’ve upgraded your POS and payroll system, implement a restaurant management system that integrates with your POS, payroll, and accounting system. The tech stack we use for most of our clients is Toast + Run by ADP + Marginedge + QBO + Fathom. The right tech stack will present decision-makers with important operational and performance data so they can quickly adjust operations, menus, suppliers, labor, and more. Without real-time visibility into the key performance indicators that are driving your restaurant, you will need to do guesswork or hire more people to do all of this manually.
Invest in the systems, and you will increase your profit and cash flow. The financial dashboard is now more important than ever!
If this is a lot of information to handle, you can seek the help of an accounting service like RY CPAs that understands the restaurant industry.