Are you aware of tax deductions and credits your hospitality business may be eligible for? Many hospitality owners tend to focus on the day-to-day operations and dealing with compliance regulations. Tax related matters tend to be postponed until after the end of the year. Now is the time to plan ahead for tax deductions to maximize the tax savings in the future. Smith Schafer has provided a list of possible deductions and credits to help our hospitality clients, prospects and others be aware of possible tax savings in the hospitality industry.
1. TIP CREDIT
Hospitality businesses may be able to claim a credit for social security and Medicare taxes paid or incurred by an employer on certain employees’ tips. This credit is part of the general business credit.
You may claim this credit if you meet both of the following conditions:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption if tipping of employees for delivering or serving food or beverages is customary.
- During the tax year, you paid or incurred employer social security and Medicare taxes on those tips.
Generally, the credit equals the amount of employer social security and Medicare taxes (7.65%) paid or incurred by the employer on tips received by the employee.
2. WORK OPPORTUNITY TAX CREDIT (WOTC)
The Work Opportunity Tax Credit is a Federal tax credit available to employers for hiring individuals from certain target groups who have historically faced barriers to employment and discrimination in the workplace. You may be able to claim this credit on first- and/or second-year wages you paid to or incurred for these employees during the tax year.
You must ask for and be issued a certification for each employee from the state workforce agency (SWA) of the state in which your hospitality business is located. The certification proves the employee is a member of a targeted group. You must either:
- Receive the certification by the day the individual begins work; or
- Complete IRS Form 8850, Pre-Screening Notice and Certification Request for the WOTC, on or before the day you offer the individual a job and receive the certification before you claim the credit.
The new hire must fall into one of the following target groups listed below:
- Qualified IV-A Recipient
- Qualified Veteran
- Designated Community Resident
- Vocational Rehabilitation Referral
- Summer Youth Employee
- Supplemental Nutrition Assistance Program Recipient
- Supplemental Security Income Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
3. THE RESEARCH & DEVELOPMENT (R&D) TAX CREDIT
The R&D Tax Credit is an incentive for hospitality businesses to invest in research and development activities to increase growth and competitiveness. Businesses may be able to take credit up to 13% of eligible spending for new and improved products and processes.
Qualified research must meet the following four criteria:
- New or improved products, processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.
4. 199A TAX DEDUCTION
The Tax Cuts and Jobs Act (TCJA) created a new deduction for pass-through business owners. This deduction, in certain situations, may provide up to 20% tax deduction on qualified business income for eligible partnerships, S corporations and sole proprietorships. For taxpayers with taxable income exceeding $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations.
These limitations include:
- Whether the business is classified as a service trade or business.
- Taxpayer’s taxable income.
- The amount of W-2 Wages of the business.
- Unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
5. SECTION 179 EXPENSING
Beginning in 2018, hospitality businesses may deduct up to $1 million of cost of qualifying property placed in service during the given tax year. In addition, a hospitality business owner may purchase up to $2.5 million in business property qualifying for the Section 179 deduction each year before the benefit is phased out. Limits will be indexed for inflation starting in 2019.
TCJA expanded eligible costs to encourage property improvements. The definition of eligible property includes certain depreciable tangible personal property used predominantly to furnish lodging. It also includes “qualifying expenses” such as roofs, HVAC, fire alarm, and security systems for non-residential property. Costs incurred as part of new construction cannot be expensed under the Section 179 deduction. The increase in amount of Section 179 allowed encourages business to increase their capital expenditures budget.
6. IMMEDIATE 100% EXPENSING (BONUS DEPRECIATION)
TCJA now allows hospitality businesses to fully expense certain capital expenditures instead of depreciating them over a several year period. These expenditures, including acquisitions of used property, may be fully expensed starting with business assets placed in service after September 27, 2017. Bonus depreciation will begin phasing out for assets placed into service after December 31, 2022. This immediate tax benefit is likely to encourage more capital spending.