Top Ten Tax Mistakes For Restaurant Owners

by Gray Reed & McGraw
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If you are thinking about getting into the restaurant business there are a multitude of issues that you need to consider. One of the most important is taxes.  By this I mean, doing the appropriate advanced planning and also running the business properly. Here is my top ten list of mistakes restaurant owners make:

  1. Employee Classification – Misclassifying workers as independent contractors and not employees can be  terrible problem.  Restaurant workers (chefs, waiters, dishwashers, etc.) are employees.  Employers don’t get to arbitrarily pick classifications.  The underlying question is whether the worker is under your “direction” and “control.”  Good news is that if you have misclassified there are a variety of solutions. For instance the IRS has a voluntary classification settlement program that can mitigate damages if you act quickly enough.
  2. Choice of Entity – This is an important decision that needs careful thought.   Proper choice of entity can save you tax if the company is profitable and shield you from tax liability if it is not.  For instance, certain types of limited liability entities can shield you from discharge of debt income (a common problem for restaurants) – others cannot.
  3. Failure to Pay Employment Taxes – Many companies in distress find that in order to keep the company going they have to delay payment to certain creditors.  A favorite is not paying employment taxes.  This is usually a HUGE MISTAKE.  The IRS not only hits the company with huge penalties – but the responsible persons can be liable for the Trust Fund Recovery Penalty in their individual capacity.  The trust fund recovery penalty is also not dischargable in bankruptcy.
  4. Failure to Maintain Good Standing with Secretary of State - It is very common for business owners to fail to observe responsibilities with the Texas Secretary of State and/or the Texas Comptroller.  This can lead to loss of limited liabilty.  For instance, Texas law provides that if a company fails to file a report or pay a tax or penalty – each director or officer of a company will face personal liability for any debt of the company.
  5. Paying Sales Tax - Failure to pay the appropriate sales tax will lead to personal liability for these taxes.  Additionally, the Texas Comptroller does not take kindly to this failure and can and will shut the restaurant down.
  6. Tip Reporting - There are IRS tip reporting requirements for both employees and employers.  You need to have a system in place that properly accounts for this.
  7. Structuring Deposits - Generally, when a deposit of cash is made into a bank of greater than $10,000 a Currency Transaction Report (CTR) must be filed.  For restaurant owners dealing in cash is a normal operation.  And large deposits are not uncommon.   Many people think that the CTR will raise red flags. The bigger red flag is when you attempt to avoid the requirement by depositing less than $10,000 on a regular basis.  This is a felony!  To avoid this problem altogether you can actually apply for an exemption with the government.
  8. Failure to Employ Qualified Professionals – Running a restaurant is not a do-it-yourself type operation.  There are legal/accounting issues that come up that simply require help.  Gaining good advice and assistance will generally help you make money.
  9. Not Keeping Good Records - Not many people like to go to the trouble of keeping detailed records. The Internal Revenue Code permits various business deductions – but only if you follow the rules.  The major  rule is maintaining documents that show you paid the expense and also demonstrating that the expense was business related.  If you are too busy – find a qualified bookkeeper.  The bookkeeper will save you money.
  10. Property Taxes – Generally, restaurants will lease a location to operate the business (as opposed to buying the property).  It is important to have a well written lease that clearly delineates who will be responsible for paying property taxes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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