September 2010 was a watershed for Atlanta’s independent restaurants. Not only is the Great Recession receding as a bad memory but same-store sales are picking up significant momentum going into the crucial fourth quarter when restaurateurs hope to finish the year with strong holiday sales.
NetFinancials September 2010 survey of 67 independent Atlanta restaurants, its third survey of 2010, reveals that September same-store sales increased a whopping 7.4% over sales for September 2009. The September same-store sales gains are broad-based, rippling through three major Atlanta restaurant sectors – fast-casual, causal and fine dining.
How are individual restaurants doing?
A hefty majority of Atlanta restaurants were really cookin’ in September. Of 67 restaurants surveyed, an amazing 78% reported positive sales trends compared to September 2009. Thirty-seven percent of restaurants surveyed showed double-digit sales gains in September. That is a startlingly strong up-tick in sales volume.
The September results contrast with our May 2010 survey which showed that only 55% of restaurants reported same-store sales increased over May 2009. September’s 7.4% sales increase is twice the 3.7% increase in same-store sales measured in May 2010.
The NetFinancials’ September sales survey also looked at year-to-date sales trends. Sixty-one percent of the restaurants in the survey reported 2010 year-to-date sales gains over 2009. Again, that is a significant improvement over the May 2010 survey in which only 50% of restaurants indicated that year-to-date 2010 sales were ahead of 2009.
Conclusion
Robert Wagner, NetFinancials president states that, “Finally Atlanta same-store sales are accelerating! Our September survey shows clearly that the recent, long recession is giving way to a substantial, broad-based recovery of sales among Atlanta’s independent restaurants. The survey results are easily the best sales trends we have seen in several years. In addition, there are indications that sales will remain strong through the rest of 2010.” The Sample: The 67 independently-operated, non-franchise restaurants were drawn from the metro Atlanta market. Total September 2010 sales in our survey were $10,566,420. Our sample included restaurants in Atlanta’s fast casual, casual and fine-dining segments.
Wednesday, November 3, 2010
NEW TAX LAW
This September Congress passed and the president signed into law a series of new tax laws implementing changes to tax law effective January 1, 2010. Hard to have serious tax planning if we don't know the law until the year is two-thirds over as is the case for 2010.
There are many summaries cirulating that recap the new tax law - a subject that's dry as toast. I like the summary prepared by and recieved from an Atlanta CPA, Kent Bridges of Bridges & Dunn-Rankin, LP (www.bridgesdunnrankin.com). Here is what Kent had to say about the tax law changes:
· Bonus first-year depreciation – For most new depreciable assets (other than buildings) placed in service during 2008, The Economic Stimulus Act (which was passed in early 2008) permitted 50% of the cost to be expensed immediately, with the balance recovered under the regular depreciation rules. This special first-year deduction applied both for regular tax and alternative minimum tax. For autos and light trucks, for which first-year depreciation would otherwise have been limited under the so-called “luxury automobile rules”, bonus depreciation of $8,000 could be taken (bringing the total deduction for such to approximately $11,000). These bonus depreciation rules were to have applied only for 2008. However, the rules were subsequently extended through 2009, and this new legislation further extends bonus depreciation through the end of 2010. Also, for purposes of the long-term contract accounting rules, bonus depreciation will be decoupled from allocation of contract costs under the percentage of completion method.
· Increased section 179 expense amount – The amount of furniture and equipment purchases that businesses can elect to immediately expense is increased to $500,000 for purchases made during 2010 and 2011, and the level of purchases at which this benefit begins to be phased out is increased to $2,000,000. This benefit is also now extended to cover the cost of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
· Increased deduction for start-up expenses – For tax years beginning in 2010, the amount of start-up expenses which can be immediately expensed is increased to $10,000.
· Increase in exclusion for gain on sale of Qualified Small Business Stock – Under current law, non-corporate taxpayers may exclude from taxable income 75% of the gain from the sale of “qualified small business stock” which has been held at least 5 years. The new legislation increases this exclusion to 100% for qualified stock purchased after the date of enactment and before January 1, 2011. Further, while the benefit of the exclusion has in the past been somewhat limited by an alternative minimum tax add-back, the alternative minimum tax adjustment will not apply to qualified stock purchased during this period. Accordingly, gain from the sale of qualified stock could be completely free of Federal tax.
· More favorable treatment of small business tax credits – “Eligible small businesses” (those with average annual revenue of less than $50 million) will be able carry general business credits generated in 2010 back 5 years. Further, such credits will be able to offset both regular tax and alternative minimum tax.
· Shortening of the “built-in gains tax” period for S-corps – C-corporations which make a Subchapter S election and then sell their assets within 10 years of electing S status are subject to a corporate level tax (the “built-in gains tax”) on any unrealized gains that existed at the effective date of the S election. For asset sales which occur during 2009 or 2010, legislation enacted last year shortened this period to 7 years. For asset sales which occur during 2011, the new legislation further shortens the period to 5 years.
· Deduction of health insurance in computing self-employment tax – For 2010, self-employed persons may deduct their health insurance premiums not only in computing income tax, but also for purposes of the self-employment tax.
· Cell phones no longer listed property – For tax years beginning after 2009, cell phones and similar telecommunications equipment will no longer be subject to the strict substantiation-of-use requirements which apply to “listed property”.
· Information reporting by owners of rental property – Under the new legislation, owners of rental real estate will generally be subject to the same information reporting requirements as businesses, which means that they will need to file Form 1099s with respect to payments of $600 or more to service providers.
· Increased penalties for late filing of information returns – Consistent with recent trends, the legislation seeks to offset some of the cost of its favorable tax provisions with increased penalties for late filing of information returns such as 1099s.
· Roth conversions within employer plans - Participants in employer-sponsored retirement plans which include a Roth feature, will be able to convert pre-tax balances to Roth status, provided the funds are otherwise eligible for distribution at the time of conversion. The conversion is a taxable event.
· Sourcing of guarantee fees for foreign corporations – Foreign corporations which receive fees from their U.S. subsidiaries for guaranteeing their debt will be required to treat such fees like interest under the sourcing rules, which will generally mean that such fees are subject to U.S. withholding tax, unless otherwise exempt under an income tax treaty.
Monday, July 12, 2010
The Atlanta Business Chronicle has published Bob Wagner's article about the reluctant recovery of Atlanta Restaurants from the recession. He has also been interviewed by WGST radio this am.
Sunday, July 11, 2010
Atlanta’s Independent Restaurants and the Reluctant Recovery By Robert Wagner, CPA
Yes, Atlanta restaurant sales continue to improve. Mother’s Day helped with ‘families who brunch,’ and waits for “Dads and Grads” dinners were long. In fact, aggregate sales for May 2010 at surveyed restaurants increased 3.7% over sales for May 2009 - a slight improvement over our February restaurant survey. February 2010 total restaurant sales increased just 1.3% over sales the prior February.
How are individual restaurants doing?
The number of restaurants in our survey showing sales increases edged out those showing sales declines. Of the 62 restaurants surveyed, 34 experienced increased sales over May 2009. Twenty-eight restaurants showed sales decreases from the prior May. So that’s 55% showing a sales rise, with 45% reporting a sales decline.
We also examined year-to-date 2010 sales compared to 2009. And here the results are about the same. Of the 62 restaurants surveyed, 50% had year-to-date 2010 sales greater than 2009 sales and 50% showed 2010 year-to-date sales declines.
Conclusion
Much like the rest of the area’s economy, our Atlanta restaurant industry is still waiting for a robust economic recovery. While May aggregate restaurant sales increased slightly, only a little over half of the restaurants we surveyed saw a sales increase in May. And that’s compared to very weak sales for May 2009! The Great Recession may be over but many Atlanta restaurant operators feel trapped in a reluctant recovery. With highly-regarded restaurants such as Repast and Joel closing their doors, many independent restaurants are still looking for a post-recession “bounce” to show up at their cash registers. The Sample: The 62 independently-operated, non-franchise restaurants were drawn from the metro Atlanta market. The sample includes restaurants in the fast casual, casual and fine-dining segments. Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com. www.netfinancials.com
Wednesday, July 7, 2010
Exploration
This weekend my husband, 6 month old baby and I traveled to Nashville to visit some friends who recently relocated there. The brief trip brought to mind the need to explore and experience things for the first time. All too often we fall into a routine and settle for the status quo. I found myself envying my daughter who is experiencing everything for the first time. From the goats on the farm we visited to the pug and German Sheppard we stayed with to the carrots you see here.
Each activity was received with such excitement! I was also jealous of our friends who are diving into the Nashville food and beverage scene to find their favorite restaurant and watering hole. (If you are ever in Nashville check out Monell’s for family style home cooked breakfast and The Patterson house for a throwback to Prohibition ambiance and delicious, innovative cocktails!)
While on vacation I love to explore what the locals do and where they eat yet at home I find myself eating at the same quality restaurants and going to the same Atlanta attractions week after week and year after year. Then I realized there is nothing stopping me from living like a tourist in my own town! It’s time to check out festivals and revisit museums, to look for new restaurants off the beaten path and go explore the OTP scene.
Please send me your suggestions of local hideaways and new adventures to explore.
On March 18, 2010 the Hiring Incentives to Restore Employment (HIRE) Act became law. The act has some really juicy tax benefits for employers that hire folks who have been unemployed for a while.
Payroll Tax Exemption
For an employer that hires a “qualified” employee the employer gets an exemption from paying social security tax on the new employee’s wages. The social security tax is calculated at 6.2% of wages paid. So for each $1,000 in wages paid to a qualified employee, the employer saves $62.
In order to take advantage of this tax break, make sure your payroll company knows you have hired a qualified employee. To do that, your new employee should complete new IRS Form W-11; available at the IRS Web site – http://www.irs.gov/pub/irs-pdf/fw11.pdf. Send the completed Form W-11 to your payroll company and then double-check your payroll reports to be sure that you are getting the HIRE tax exemption.
New Hire Tax Credit
In addition, the employer can claim a generous income tax credit on their 2011 income tax returns for each HIRE employee retained more than a year. The credit can be as much as $1,000 per retained HIRE employee.
Special Considerations for Restaurants
Restaurant operators should certainly consider taking advantage of the HIRE act for all new kitchen and front-of-the-house employees. It gets a little tricky when taking the HIRE tax exemption for new servers. Normally payroll taxes on server wages qualify for the FICA tip credit. Taking the HIRE tax exemption will mean that the FICA tip credit at the end of 2010 will be lower than normal. So while the HIRE tax exemption is a good thing even for servers, the restaurant operator may end up owing income taxes for 2010 because his FICA tip credit is lower than was expected. There is a similar issue with employees that qualify for the Work Opportunity Tax Credit (WOTC).
In addition, the HIRE tax credit available in 2011 may be limited on the restaurateur’s income tax return. That’s because the credit is subject to the Alternative Minimum Tax. If the operator cannot use the HIRE tax credit, at least the credit can be carried forward to another tax year.
Qualified Employee
The HIRE act tax reduction benefit is available only for a qualified employee – that is, an employee that began employment after February 3, 2010 and before January 1, 2011, who has been unemployed (or underemployed) during the 60-day period ending on the date he/she is employed. The qualified employee must certify that they have not been employed for more than 40 hours during the 60-day period ending on the date they start employment. Employees use Form W-11 to certify their unemployed status. Supply the Form 11-W to your payroll company. It does not need to be sent to the IRS. Note that the HIRE benefit is NOT available for an employee that is hired to replace an existing employee UNLESS the existing worker terminated voluntarily or for cause. Family members of the employer do not qualify for HIRE.
Bottom Line
The HIRE is a terrific tax benefit for restaurant operators. There is very little downside to taking HIRE to reduce payroll taxes for kitchen and management staff. In this economy, operators can use all the help they can get.
For restaurants with servers, care should be exercised in taking HIRE for servers since the reduction in payroll taxes will certainly reduce the amount of FICA tip credits available for 2010 and 2011.
A new restaurant operator is faced with countless decisions from location and staffing to the lower priority items of accounting. The choices associated with accounting set up are not glamorous but setting good policies early on can save headaches down the line. One question we ask new clients is “What type of accounting period would you like to use? Monthly? 4/4/5? 13-4 week periods?”. Operators coming from different industries often wonder the relevance of this question while those who have worked in many restaurants usually have an immediate answer. Here are some factors to consider while dates swirl in your head. Calendar month · Easy to remember period dates · Requires payroll accruals · Year to year comparisons can be misleading when there is an extra weekend in one year · Holidays are consistent for year to year comparisons
4/4/5 or 5/4/4- Two four week periods followed by a five week period · Allows for the same number of each day of the week each year for comparisons · If biweekly or semimonthly payroll is run payroll accruals are needed in some periods and not others · Can be confusing for people wondering, “is this the five week period?” · Allows flexibility in day of the week chosen for period end date · Different reporting periods for sales and payroll taxes vs. financial statements
13 four week periods · If a biweekly payroll is used no accruals are needed · Allows for the same number of each day of the week each year for comparisons · Allows flexibility in day of the week chosen for period end date · Requires a “catch up” 53rd week be added every fifth year · Different reporting periods for sales and payroll taxes vs. financial statements
One of the most important factors to consider when making the decision is who will be the primary user of the financial statements? Will it be operations staff or more financially savvy bankers? The more adept the user is at analyzing financial information, the more complex your set up can be.
Getting away – really away – from the workaday world is a great way to get perspective on one’s business.
Recently I was fortunate to spend two weeks in Australia. Take it from me… if you get the chance to go to Australia, take it. Australians are probably the nicest people you will ever meet. They are patient, approachable, engaging, and fun loving. The only minor issues are 1) Australians talk funny 2) getting there takes forever and 3) Aussies drive on the wrong side of the road. Avoid driving “down under” unless you want an extra dose of excitement in your visit.
Talking with restaurateurs and vintners on the other side of the world gives another perspective to the issues and challenges of the Atlanta restaurant industry. The restaurant industry there, as here, is vibrant, dynamic and challenging. Here are a few principles that unite restaurant operators from these two countries:
· Sales cover a lot of sins – Driving revenues is important in Australia as it is here. There is just no replacement for have robust and consistent revenues. Operators can make mistakes but can recover when sales are strong. · Local and fresh ingredients are king – It is remarkable how incredibly similar to the US is the focus in Australia on fresh ingredients used “in season” and from local growers. · Prime cost rules – No matter where your restaurant, prime cost is a critical measure of success. Restaurants that get prime cost right are likely to be profitable and long-lived. · Talent out the ears – Increasingly well-trained, conscientious cooks can be found in the US in the most unlikely places. In Australia it is not at all unusual to run into a classically-trained chef working away in her own shop in a small “outback” town · Diversity"It's what's for dinner" – Not long ago Australian restaurants were mostly known for fish and chips. Not unlike our own Southern fried chicken and BBQ. Thanks to more lenient immigration policies in the US and Australia new international flavors, cooking techniques, spices and dishes are flourishing.
To be sure there are major differences between operating a US restaurant and one in Australia. · Volume is less there – Australia is a country the size of the US but with only the population of New York State. Outside of the 3 or 4 big cities, there just isn’t the population or the sales volume found in the US. And yet professionals still pursue their passion for food and wine. It makes for a slower pace of life but no one appears to mind. · Labor is higher but tipping is less – In the US servers are typically paid $2.13/hr. So they live on what they make in tips. This has a salutary effect of encouraging servers to see that tables turn efficiently but quickly. The owner has the same objective. In Australia restaurants are required to pay servers a higher wage. Naturally this results in higher menu pricing. But tipping does not carry the same importance there. Servers make higher wages and therefore are less incented to see tables turn quickly.
Visiting other restaurant operators reminds us that some universal principles apply to our industry. It may even raise the curtain on future trends and developments we are likely to experience in our Atlanta restaurant market.
For years restaurateurs have been folding Internet technologies into their businesses. It’s all on the Internet: ordering - promotions - credit cards – banking- reservations - food ideas - cocktail recipes! Restaurant operators go online daily. Even so, operators are just now really dipping their spoons deeply into the rich world of the Internet! The most significant new trends in restaurant technology are deeply rooted in the online world.
· Social Media – Secret of Successful Operators
Social media is how people share information in the Internet age. It is utterly amazing how social media, the world of Facebook, Twitter and blogs, is impacting even the smallest local restaurant operator. Restaurateurs that ignore social media do so at their peril. As accountants we can see the business impact of social media on local Atlanta restaurants. Simply stated, restaurateurs that promote their restaurants through the use of social media see an increase in sales. In many cases the impact on sales is substantial. As Tom Murphy of Murphy’s in Virginia Highland recently told me, “There is a conversation about our restaurant occurring every day on the Internet. We must be a part of that conversation.” Restaurant operators are employing social media to drive revenues, both through tightly targeted ‘touchs’ and through more broadly based methods including: 1) email messages about special offerings and events 2) Facebook invitations to “friends” for in-store promotions, 3) Tweet messages about limited time offerings, and 4) aggregated promo services such as Groupon. Tom Moore of Brick Store Pub tells how they “tweet” the arrival of a limited-supply beer and 8 to 10 customers show up for the special. We can raise a glass to that idea!
· Your Next POS Will Be A Subscription
Today operators spend thousands of dollars on point-of-sale (POS) technology - and then pay an annual maintenance fee for support and upgrades. In truth, the POS technology you purchase is obsolete the day it is installed. Insult to injury, operators and POS companies face a minefield of technical and other problems keeping POS systems upgraded and protected from credit-card hackers. It is a system that has generally worked...until now. Alan Wright of Postec, the POS company told me that “The push of legal liability and the pull of new technology will shift restaurants to a subscription POS model.” Today buying a POS is like buying a car – a large up-front investment and smaller maintenance investments. Tomorrow buying a POS will be like buying an insurance policy – a small upfront investment followed by a stream of payments covering hardware, software, maintenance and training. All sales and non-financial data will be kept at a secure, off-site location.
· Your Office Is Going Paperless
NetFinancials is primarily a large restaurant back office. Each month we handle the books for around 100 restaurants. About two years ago we decided to try the “paperless thing”. Today virtually all our internal documents are paperless. Here’s what we learned: 1) It’s easier to go paperless than you think, 2) paperless does save money - particularly on supplies and storage, and 3) your data is now easier to find - no more searching for files in the storage closet. Also, there are a growing number of options for storing data on-line. These “Internet filing cabinets” store your data making sure it is safe and available to you when you need it. All that most restaurants need to get started is a desktop scanner, an extra computer monitor and an Internet connection. Technical innovation is a reality - both exciting and breathtaking - that opens many possibilities for businesses. Savvy restaurant operators are making this innovation work for them, building more successful, satisfying and profitable operations.
Monday, May 10, 2010
RESTAURANT CONFERENCE CANCELLED DUE TO LACK OF INTEREST!?
Every other year the American Institute of CPAs puts on a restaurant conference. There is actually a lot to discuss and learn about restaurant accounting and taxation. The restaurant arena is constantly changing. We have ever changing tax laws, new employment rules and regs and the assertive SEC (Securities and Exchange Commission) setting rules of how restaurant companies report their operations to the public. This stuff might put most people to sleep but it is critically important to the smooth and efficient functioning of one of the largest segments of our national economy. There are over 12 million people employed in the restaurant industry - not counting ancillary employment.
So 2010 is the year "on year" when the conference is to occur. But it has been cancelled for lack of interest; meaning not enough people paying $1 thousand a pop to attend. That is incredibly unfortunate for the restaurant industry. There is an amazing amount of misinformation and just bad practice committed by uninformed restaurant controllers, financial officers, accountants, etc.
What can be done to bring back the National Restaurant Conference? For one thing, stop trying to hold it in Las Vegas! Who in their right mind wants to go to Vegas in June when the temp is 110 degrees and watch a bunch of seniors lose their shirts at the slot machines? Try going back to Chicago and mesh it with the May Food Show. Accountants could get two birds/shows with one stone.
Tell me what you think. Is it good riddance or should we try to hold a regional restaurant conference? Anyone up for a Southeast Restaurant Conference?
Atlanta’s Independent Restaurants – Ordering Up an End to the Recession! By Robert Wagner, CPA
For many of Atlanta’s independent restaurant operators, the worst recession in a generation is ending, indicates NetFinancials’ latest survey. Our findings are doubly significant given the atrocious February weather that was served up to the Atlanta restaurant industry and consumers.
Aggregate sales in February 2010 are up over last February’s sales. Aggregate sales for February 2010 at our surveyed restaurants increased a little more than 1% over sales for February 2009.
How are individual restaurants doing? Of the 53 Atlanta restaurants surveyed, 32 (60%) recorded increased sales over February 2009. Twenty-one restaurants reported decreased sales compared to last February.
We also examined year-to-date 2010 sales compared to 2009. Here the results were not as good. Of the 53, only 25 (47%) had 2010 sales greater than year-to-date 2009 sales. Twenty-eight restaurants showed decreased year-to-date sales compared to 2009. However the 2010 year-to-date result is an improvement over our October 2009 survey which showed 79% of restaurants with 2009 sales less than 2008 sales.
The Winners: Unique as we are, Atlanta’s restaurant scene mirrors national eating-out trends. Casual-dining and neighborhood-focused restaurants are generally seeing better sales trends than fine-dining and visitor-focused restaurants.
Conclusion: February 2010 sales indicate the recession in the local restaurant market is ending. Customers are venturing out again to take advantage of Atlanta’s many dining out options and special promotions. That said Atlanta restaurant operators are not yet in the clear. Year-to-date 2010 sales levels are no better than anemic 2009 sales levels.
The Sample: The 53 independently operated, non-franchise restaurants were drawn from the metro Atlanta market. The sample includes restaurants in the fast casual, casual and fine-dining segments.
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com. www.netfinancials.com
3 Ways to Survive a Sucker Punch in the Great Recession By Robert Wagner, CPA
A sucker punch is a blow made without warning, giving a gal or guy no time for preparation or defense. For restaurant operators, the Great Recession has delivered a sucker punch to their businesses. Operators have been “one-twoed” by the perverse and continuing decline in revenues and stubbornly high operating costs.
Some economists have declared the steepest recession in 50 years over; but that is not what it feels like to Georgia’s restaurant owners and operators. Through the first quarter of 2010 there is continued softness in restaurant sales. It’s just not a fair fight when lower sales make it hard to cover fixed costs such as rent, insurance and salaries and still make a profit.
Restaurant operators are not ones to give up - even in the face of very poor odds. They stand and fight as long as there is strength, even after taking a sucker punch or two. But operators can increase their odds of victory. Here are three steps operators can take to improve their chances of staying in the ring.
1. Don’t Mess with the Government
Paying sales and payroll taxes is a big cash drain on a restaurant. It is very tempting to put off paying these taxes and plan to catch up later. Don’t try it! There are two reasons to do everything possible to stay current with your taxes. The first is that penalties are severe for late paid taxes. Penalties and interest combine to make “borrowing” tax dollars by paying late one of the most expensive loans you’ll ever get. Second, officers of the company may be personally liable to make good on unpaid taxes, penalties and interest. That liability could hammer the owners for years after a restaurant closes.
2. It’s the Prime Cost, Stupid
In 1992 Bill Clinton ran a successful presidential campaign focusing on the sorry state of the economy. In his campaign headquarters hung a reminder of the issue that would prove to win the election. It said “It’s the Economy, Stupid”. The sign implied that staying focused on the most important issue on voters’ minds would carry the election. And it did!
Just as Clinton stayed focused on the essential issue, restaurant operators can fight this economic sucker punch by focusing on the basics of running their restaurants. The single most important metric in measuring a restaurant’s health is prime cost defined as cost of sales plus payroll expenses. Of the 100+ restaurants we work with, we have not seen a restaurant in financial trouble that has a consistent and appropriate prime cost.
What is the magic prime cost percentage? For independent restaurant operators it’s 65% of revenues. For franchise operators it’s 60% of revenues. If prime cost is consistently well above 65% of sales, there usually isn’t enough cash to cover other expenses and make a profit.
During the recession many restaurants are seeing prime cost climb to 70% and even 75% of sales. What’s happening? Normally a well-run restaurant can keep a lid on its cost of sales. Almost always the problem is payroll expense. Even when an operator is faced with declining revenues, he hates to cut payroll. The aim is to keep on that manager that’s been there for years or to plan for that sales rebound when more labor will be needed. Whatever the reason, operators hate to cut payroll. But to roll with the punches and fight another day, operators must preserve scarce operating cash. The best way to do that is to get prime cost in line immediately.
3. Reduce Bank Debt
The media is full of stories of debtors who stopped paying the bank - and the bank just let the debt ride. Not a good idea! Lately we’ve seen banks declare business loans in default faster than ever. Big banks have set up huge “special asset” departments meaning bankers working loans in default. The bank machinery handling defaults and foreclosures is running over-time. Don’t get knocked out by that machine.
Studies show that the single best indicator of long-term success of a restaurant company is the amount of debt the company carries. The higher is a company’s debt, the higher the likelihood of failure. It’s a simple concept but hard to correct. After all, how does one reduce debt in a recession? There are only three ways to reduce debt: pay the debt from profits, replace old debt with new debt or pay off debt with additional investment. Of these options, perhaps the only one viable now is bringing in new investment. New investment means giving up ownership perhaps to an outsider and perhaps on unattractive terms. But it is the one way to staunch some of the cash bleeding and guard against foreclosure.
Conclusion
The Great Recession has sucker-punched a lot of Georgia restaurant operators. To have a fighting chance at victory focus on the basics like prime cost, debt reduction and tax liabilities. Watch your numbers and make your swings count!
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Phone: 404.874.7002 Email: bob.wagner@netfinancials.com
FICA Tip Tax Credit – A True Benefit
by Robert Wagner, CPA
Go ahead! Try saying “tax” and “benefit” in the same sentence. Can’t do it? Well, try this one– the FICA tip tax credit is a terrific benefit for restaurant operators. In an amazing concession to the restaurant industry, Congress enacted – then improved – a tax credit for payroll taxes paid on server tips. Operators may make a costly mistake if they don’t claim the FICA tip tax credit on the restaurant’s annual income tax return.
How much tax credit can you expect? The amount of credit varies depending upon the total server tip rate. The higher the tip rate, the higher the tax credit. Our studies show that a typical full-service restaurant can expect a tax credit of up to $10,000 for each $1 million in sales. Restaurants with higher server tip rates can expect higher tax credits.
The FICA tax credit has been available for over 10 years, but the credit was significantly enhanced in a strange bargain between the Congress and the restaurant industry. In 2007 when Congress was debating the minimum wage increase, the restaurant lobbyists were working overtime. They struck a deal with Congress. In exchange for not opposing a higher minimum wage, the restaurant industry got a new, improved FICA tax credit plus no change in the server wage of $2.13 per hour (some states have a higher server minimum wage). Until the 2007 law change, the FICA tip credit was severely limited and so wasn’t much use to operators.
FICA tip tax credit points to remember:
· Restaurant companies claim the tax credit and then typically pass the credit to their owners and investors to be used on their individual income tax returns.
· Only “creditable” tips qualify for the tax credit; i.e., server tips in excess of the old minimum wage of $5.15 per hour.
· The credit is NOT limited by the Alternative Minimum Tax.
· Any unused credit can be carried back one year or carried forward 20 years.
· Even if a restaurant company lost money in 2009, it can still claim the tax credit.
· Restaurants that have not claimed the credit in the past may amend their prior year’s tax returns to claim the credit; however, amending a return may increase the chance of an IRS audit.
No joke! The FICA tip tax credit is the most important tax benefit for restaurant operators passed by Congress in at least 20 years.
Every major payroll service can prepare a FICA tip tax credit report for their restaurant clients - but you have to ask for it! Same goes for employee leasing companies. In some cases the payroll company charges a nominal fee for the report. If your payroll service provider gives you a tip credit report, don’t automatically assume it is correct. Have your tax professional test the calculation so you have peace of mind knowing you are taking full advantage of this tremendous tax benefit. There you go. “Tax” and “benefit” in the same sentence
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com. www.netfinancials.com
Increasing same-store sales is the Holy Grail for restaurant operators and investors. For a restaurant to be financially successful, sales must increase over the same period in the prior year. To take the temperature of local restaurants we surveyed October 2009 same-store sales for 52 closely-held, mostly Atlanta-based restaurants.
The result? In the aggregate, restaurant sales in October are flat. Total sales for October 2009 increased less than 1% over sales for October 2008.
How are individual restaurants doing? Of the 52 restaurants surveyed 24 or 46% of the total recorded increased sales over October 2008. Twenty-six restaurants or 50% of the sample showed decreased sales compared to last October. Two restaurants showed no change in sales.
We also looked at how these restaurants are doing year-to-date 2009 compared to 2008. The results are sobering. We narrowed the sample to 48 restaurants. Of the 48, only 10 or 21% of the sample had 2009 sales higher than year-to-date 2008 sales. Thirty-eight restaurants or 79% of the sample showed decreased year-to-date sales compared to 2008!
Conclusion: By October 2008 the national recession had seized the local restaurant market. Consumers were reining in their spending. Restaurant sales were already headed down. In October 2009 while total restaurant sales are not getting worse; they are not getting better either. We are “bumping along the bottom” – the sales “bottom” created when the recession latched on to consumers’ wallets.
The Sample: The 52 restaurants were drawn 90% from the metro Atlanta market. The sample includes restaurants in the fast casual, casual and fine-dining market segments. All sales were reconciled and therefore carry a high degree of accuracy. Aggregate sales from the sample for October 2009 were $9.01 million. For October 2008 aggregate sales were $8.95 million.
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com. www.netfinancials.com
San Francisco is one of the great American cities. And the home of restaurant innovators. It has been said with good reason that all restaurant trends start on the West coast and move east. What's the latest trend? Check out the burgeoning number of "boutique burger" restaurants springing up in large urban centers. In addition, we have not exhausted the urban diners' interest in Asian-American cuisine. An excellent practitioner of this discipline (not too Asian but not too American) is The Slanted Door in the Ferry Building in San Francisco. Well worth a stop if you are in the area.
While in San Francisco last week and looking for a place to hide during a rainy afternoon, I ducked into the SF Museum of Modern Art to spend 4 delightful hours. Though I like modern art, there is much of it I do not understand.
Listen to the media and you'd think a "help wanted" sign is scarcer than hen's teeth. But here you have one. NetFinancials has a team member taking maternity leave in January. We are looking for a full-time, experienced tax professional to work in our Midtown Atlanta office from February through April 2010. Work includes income, personal property and other return preparation. Please send resumes to bob.wagner@netfinancials.com.
It is often said that a restaurant is a business of pennies. That does not refer to what is left in the cash register at the end of the night. It means that a restaurant is a business of producing and selling hundreds, even thousands, of modestly priced items a day. Success for a restaurant is not only making the guest happy. It is also costing and pricing the menu thoughtfully. Menu pricing and costing decisions - good and bad - are multiplied by the many items sold each day.
Often I get a call from a restaurant operator because her food costs are out of control. The operator knows her food cost is too high but does not know why. (What's a good food cost? 32% of net sales unless we're talking about a steak house in which case 37% is more appropriate.)
I'm delighted to stop by and investigate the mystery. We discuss operations. After a few minutes, I ask the operator whether she costed out the menu. That is, looked at each important menu item and determined the item's plate cost. The operator says that, yes indeed she costed out the menu ..... when the restaurant first opened two years ago. Typically when I ask to see the plate cost calculations, they cannot be produced. Perhaps they haven't been updated in years.
The first step to gaining control of food costs, portion control, kitchen waste, and menu pricing is to cost out the most important items on the menu. It sucks, because it's math. But that can't be helped. So if you're concerned about food your cost, take the leap. I have attached a PDF worksheet for costing out a menu item. Plate Cost worksheet
Every month we prepare a lot of financial statements for restaurant operators. Even during the bleakest days of the recession, some restaurants were making money. Unfortunately most restaurants, then and now, are dealing with negative sales trends and dwindling cash balances. When a restaurant is in trouble, the owners feel it - like a weight around their necks. Problem is the restaurant staff feels it too. The fear and the stress is on everyone's mind. So, here's what I don't understand. While there are still patrons coming in the restaurant...Why doesn't the restaurant focus on giving the customer a reason to come back? It boggles the mind. 80% of all restaurant sales are from repeat customers. To survive, a restaurant must give the customer a reason to come back. But they don't. I don't get it. To attract a loyal clientele, make the dining experience fun - for both customers and for wait staff. Here's a rule: The front of the house must be fun!!
"Fun" does not mean expensive. Everything a restaurant needs is right there. Take a twenty out of the til and, with a big show, award it to the server with the best sales last night. Or give the twenty to the server that had the highest number of covers or served the last martini. Simple stuff but catchy. The cornier the better. Create a sense of excitement and even friendly competition. How about when the manager makes a table visit, he picks out a party and offers them a bet? If the manager wins, the customer pays their tab - just as usual. If the customer wins, the manager buys their entree or appetizer. Talk about creating excitement!
There is a side benefit to making a restaurant fun - higher employee moral and lower turnover. What's to lose?
Uncle Sam Wants You! …… to buy equipment. Hard to believe, but true. Recently Congress passed and the President signed an extension of significant tax breaks on equipment purchases through 2009. So, buying a POS system gets you up-to-date technology and a very attractive tax deduction. Unless a business “elects out” of the tax breaks, your will write-off, i.e., get a tax deduction for, most or all of the equipment you purchase in 2009.
Give Yourself a Bonus
Bonus depreciation on equipment comes in and out of the tax laws depending on the economy. Allowing businesses to write off equipment rapidly is thought to be a good way to spur our economic recovery. Currently purchases of new, not used, equipment are subject to 50% bonus depreciation. That means if you buy new equipment in 2009, you immediately get to write off 50% of the purchase price. And then you depreciate the rest of the restaurant equipment; usually over 5 years.
So how does this work? Suppose you spend $10 thousand for a new POS system in 2009. First, take $5 thousand in bonus depreciation and then take “normal” depreciation of $1 thousand on the remaining $5 thousand tax basis. Result: for 2009 you spend $10 thousand for a POS and get $6 thousand or more in depreciation expense your tax return. That’s a 60% write-off in the first year of ownership!
What if you are operating at a net loss in 2009? You may be able to take the loss (generated partly by bonus deprecation) and get a refund of the taxes you paid the government in prior years. This is a complicated area so it’s essential you consult your tax advisor.
Write Off 100% of Your POS
The amount of equipment a small business can elect to write off in 2009 is increased to $250 thousand. So your entire purchase of a POS could easily be written off in 2009. This tax break is harder to qualify for but many businesses might overlook it. The really good news is this tax break works for purchases of both new and used equipment.
However, qualifying for this tax break, called the Section 179 Election, is harder than qualifying for bonus depreciation. The business must jump the following hurdles:
Section 179 depreciation cannot cause or increase a tax loss for the year so the business must be profitable to qualify
The business does not qualify if more than $800 thousand in furniture, fixtures and equipment was purchased in 2009
The equipment cannot be purchased from a related party
Really savvy operators are combining bonus deprecation and Section 179 expensing to maximize tax deductions on equipment purchases and minimize their taxes. Contact your tax adviser for more info on how these tax breaks can make your POS purchase even more attractive.
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com
Remember the “Tax Gap”? When in Spring, ’07, the IRS told Congress that taxpayers were cheating on
taxes by $290 billion a year? Congress and the Bush administration got worked up about the tax cheats
among us. To address this horrible situation the IRS recommended – surprise! – increasing its own
budget. Today we are stuck with a wave of tax audits stemming from an increase in the IRS budget.
Here are five steps to remember when you get the IRS audit notice.
1. Don’t Panic. Don’t Pull an Ostrich – If you get an audit letter from the IRS, respond as soon as
possible. Ignoring the IRS is not a prescription for success. The IRS will not go away if you
pretend that they are not there! In fact, the auditor may just get hurt feelings - not a positive
development. One taxpayer ignored all those pesky IRS notices; it cost him about $10 thousand.
2. Be Professional. Hire a Professional – It’s OK to think that the IRS agent is a bloodsucker after
your money. But it’s NOT OK to tell that to the IRS agent. It will not help your cause even if you
feel better. The IRS agent has a number of tools to deal with cranky taxpayers including the tax
fraud statutes. You don’t want to go there! Treat each IRS agent as a professional, affording her
the courtesy of a prompt and civil reply to each request.
Use an experienced tax professional to represent your interests. If you are tempted to represent
yourself, just remember the adage that “He who represents himself in court has a fool for a
client.”
3. Control the Audit. Document Everything – Even when dealing with the IRS agent you have
rights. An agent may be unfamiliar with the IRS’s own rules of process and procedures. Just
because the agent asks for something does not mean you have to provide it. An experienced
professional can analyze each IRS request and suggest an appropriate response. Every
significant communication with the IRS agent should be in writing. If issues with the agent come
up later, your documentation will be a life-saver.
4. Don’t Expect the Audit to End Soon – The IRS is now trying to wrap up tax audits in 120 days
from start to finish. But don’t be fooled. We know of one IRS audit that’s been going for ten
months with no end in sight. An IRS agent works 5 or 6 hours a day; so it takes a while to open,
work and close an audit.
5. You Have a Right to Appeal – Don’t antagonize the IRS agent. But if an agent is wrong or over-
steps bounds, don’t hesitate to ask for a joint conference with the agent and supervisor. If you
have a strong case and you don’t get satisfaction from the supervisor, consider appealing the
decision. But, do so only with the help of an experienced tax professional.
We are seeing more IRS audits of restaurants than ever. Following a few simple steps will get you
through this unpleasant process with the least amount of damage.
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced
services for restaurant companies. Email: bob.wagner@netfinancials.com
Remember the “Tax Gap”? When in Spring, ’07, the IRS told Congress that taxpayers were cheating on taxes by $290 billion a year? Congress and the Bush administration got worked up about the tax cheats among us. To address this horrible situation the IRS recommended – surprise! – increasing its own budget. Today we are stuck with a wave of tax audits stemming from an increase in the IRS budget.
Here are five steps to remember when you get the IRS audit notice.
1. Don’t Panic. Don’t Pull an Ostrich – If you get an audit letter from the IRS, respond as soon as possible. Ignoring the IRS is not a prescription for success. The IRS will not go away if you pretend that they are not there! In fact, the auditor may just get hurt feelings - not a positive development. One taxpayer ignored all those pesky IRS notices; it cost him about $10 thousand.
2. Be Professional. Hire a Professional – It’s OK to think that the IRS agent is a bloodsucker after your money. But it’s NOT OK to tell that to the IRS agent. It will not help your cause even if you feel better. The IRS agent has a number of tools to deal with cranky taxpayers including the tax fraud statutes. You don’t want to go there! Treat each IRS agent as a professional, affording her the courtesy of a prompt and civil reply to each request.
Use an experienced tax professional to represent your interests. If you are tempted to represent yourself, just remember the adage that “He who represents himself in court has a fool for a client.”
3. Control the Audit. Document Everything – Even when dealing with the IRS agent you have rights. An agent may be unfamiliar with the IRS’s own rules of process and procedures. Just because the agent asks for something does not mean you have to provide it. An experienced professional can analyze each IRS request and suggest an appropriate response. Every significant communication with the IRS agent should be in writing. If issues with the agent come up later, your documentation will be a life-saver.
4. Don’t Expect the Audit to End Soon – The IRS is now trying to wrap up tax audits in 120 days from start to finish. But don’t be fooled. We know of one IRS audit that’s been going for ten months with no end in sight. An IRS agent works 5 or 6 hours a day; so it takes a while to open, work and close an audit.
5. You Have a Right to Appeal – Don’t antagonize the IRS agent. But if an agent is wrong or over-steps bounds, don’t hesitate to ask for a joint conference with the agent and supervisor. If you have a strong case and you don’t get satisfaction from the supervisor, consider appealing the decision. But, do so only with the help of an experienced tax professional.
We are seeing more IRS audits of restaurants than ever. Following a few simple steps will get you through this unpleasant process with the least amount of damage.
Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com
