Increasing profit in your restaurant by managing accounts payable

The head chef (Joe) at Joes Steakhouse orders 20 lbs of USDA Prime NY strip steak meat from Prime Meats. The price is discounted to $12/lb with net 30 payment terms due to their consistent high-volume orders. Upon delivery the next day, Prime issues an invoice to Joe for $320 (20 lbs X $16/lb). Before signing the invoice, Joe crosses off the $16, and replaces with $12, then updates the invoice total to $240. The delivery driver and chef agree to the price discount, update their copies of the invoices and move forward with their days.

30 days later, the bookkeeper for Joes Steakhouse receives a statement from Prime Meats stating a balance of $320 due. The bookkeeper never received a copy of this invoice from Joe, so he relies on the vendor’s statement for the true balance due then writes a check for $320.

Assuming Joe sells a 16 oz NY Strip steak for $45 (w/no sides), this mistake resulted in food cost for those 20 steaks increasing from 26.7% to 35.5%. Joe’s Steakhouse generates $300,000 a year in NY Strip Steak sales. If this scenario happens even 1 out of 10 times, that’s $2,668 in additional food costs for the NY Strip Steak sales! If it happens half of the time, that’s $13,334 in additional food costs! Scenarios like this are very common in restaurants. If you’re serious about growing and becoming more profitable then you need to hire an accountant that will implement all the necessary processes, controls, and technology to make sure situations like this do not occur. Your staff should not have to spend their time reconciling statements, instead they should be focusing on delivering superior hospitality to customers. Do not hesitate to ask us about these services, the benefit of hiring an expert will far outweigh the costs, especially in an industry with such delicate margins!

How service charges could be killing your restaurant…

Despite IRS revenue ruling 2012-18 which took effect on January 1, 2014, many restaurants continue to charge large parties a service charge or automatic gratuity upon checkout. Although there is nothing wrong with mandatory service charges, chances are these restaurant owners are not fully compliant with IRS law. If they were fully compliant with IRS law, they would have been advised to dump this practice a long time ago. Many full-service chain restaurants ended these practices because they received guidance from the proper accountants and lawyers, others not so much.

Lets assume the following example: Company A hosts a 10 person dinner meeting at your full-service sea food restaurant in Washington, DC. The bill totals to $1,000 and you have a policy to apply service charge of 20% to groups of 6 or more. The 20% gets split 15% to the tip pool and 5% to the house or to an events manager. Seems pretty simple right? Think again. Here are the added complications and negative consequences when mandatory service charges are applied:

  1. Sales tax is calculated on the total bill plus the service charge. Yes, I know you’re probably not doing that correctly either, but I digress. So now your guests are paying $20 more in sales tax. $1000 for food + $200 service charge + $120 sales tax ($1200 X 10%) vs $1000 + $100 sales tax + $200 tip. Your customers will be unhappy about the extra tax so the only entity who wins here is the DC government.
  2. The $150 that gets allotted to the tip pool should be reported as wages, not tips. This adds another complication in recordkeeping because now you must keep track of a service charge pool in addition to your tip pool.
  3. As a result of reporting service charges as wages, not tips, you will not receive the benefit of the FICA tax credit on these wages. Restaurant owners receive a tax credit for FICA taxes (7.65%) paid on tips. The credit is typically calculated per employee. Once the employee’s pay reaches $5.15/hr after considering hourly wage and tips, the excess tips multiplied by 7.65% is the owners tax credit. In most full-service restaurants, tipped employees are compensated in-excess of $5.15/hr so the restaurant owners almost always benefit from this credit. With that said, a restaurant is losing out on 7.65% of tax credit on all the service charges that are paid out as wages instead of tips.
  4. Applying a mandatory service charge will (in most cases) not incentivize servers to offer a superior level of service, thus diminishing your restaurants reputation.

If the 20% tips were voluntary tips (not service charges), the process would be simpler. Sales tax would get calculated on the food sales only, and the 20% tips would flow straight to employee tip pool and get paid through payroll as tips (not wages).

Since the enforcement of revenue ruling 2012-18, many restaurants have done away with mandatory service charges mostly because it is not worth the headache and complication. In most cases, the cost of implementing a compliant service charge program (due to extra recordkeeping costs and forgone FICA tax credit) outweighs the benefit of the mandatory service charge. There are beneficial alternatives to mandatory services charges that are IRS compliant. For example, we recommend adding a “Recommended Tip” line along with a 3-5% service charge that goes directly to the house. Before acting you should consult with an expert to determine the best solution for your business. RY CPA specializes in restaurant accounting and we are happy to help you build a profitable and compliant business.

The Next Level – Accounting for Success

Entrepreneurs/Business owners!!!

Please join us this Monday at WeWork Wonderbread to learn how to manage accounting and tax processes that will help your business grow and succeed… Click on the link to RSVP! Food will be provided.

This is highly encouraged for accounting heavy industries like Restaurants, Non-profits, Salons, Government Contractors, and Manufacturing/Retail.


How to NOT run a side business for tax purposes!

A few years old, but still relevant; Forbes Contributor Tony Nitti provides an insight into how to navigate the tax code when it comes to running a side business. Section 183 of the United State Internal Revenue Code, often referred to as the “hobby loss rule” limits the amount of losses that can be deducted from income derived from secondary activities and hobbies. The code lists nine factors that are used to determine whether losses from your side business can be deducted from your tax returns.

While there is no magic number of factors you should have in your favor, it helps to have as many as possible. Several of the factors are out of your control, so it helps to run up the score on the ones you can control. You can control the manner of which your business is conducted, the expertise of you and your advisers on the topic, and the time you put into the activity.

These all boil down to planning and preparation. To maximize your chances of deducting these losses, run your side activity like a regular business. You can start by developing a strategy, maintaining accurate financial records, continually seeking to improve performance, and dedicating your time to the activity.

Interested in learning more? Contact RY CPA today to find out how you can assure your side business qualifies as tax deductible.

Read the full article here.

What Small Businesses don’t know about Obamacare



Last week we posted an article from Forbes highlighting a major pitfall of the Affordable Care Act (ACA) that impacts small businesses significantly… To recap, small businesses with less than 50 employees are not required to provide health insurance to their employees, but if they reimburse these employees or pay stipends for their individual health insurance plans thenthey can be penalized up to $100/day per employee. Although this sounds bizarre, ACA, or ObamaCare actually implements an initiative with benefits that far outweigh this pitfall.

Small businesses with less than 25 full-time equivalent employee (FTE)’s that provide group health plans for their employees are eligible to receive a general business tax credit up to 50% of the amounts paid towards their employees’ insurance premiums. Yes, that is a dollar for dollar credit, not just a deduction. Any expense over the allowable credit can be used as deduction. In order to qualify, the business must have fewer than 25 FTE’s with average annual wages below $50k, pay at least 50% of employees premiums, and the group plan must be purchased through the Small Business Health Options Program (SHOP Exchanges through your state’s health insurance marketplace).

Well you might be thinking, why do I HAVE to purchase through the SHOP Exchange? Well, this is actually a benefit, not a disadvantage. Before the SHOP Exchange, larger businesses often received better deals from insurance companies due to their buying power. With the SHOP, the same insurance programs and prices are offered to large and small employers. This results in lower insurance premiums for small businesses, most of which can be offset from the small business tax credit explained above. With the appropriate tax planning, you can now offer healthcare to your employees for a fraction of the costs before ObamaCare.

Feel free to contact us in regards to this topic and ways to implement this initiative within your business.

Health Insurance and Penalties, does it affect you?

If you have under 50 employees, you must provide group healthcare coverage or provide NOTHING at all related to health insurance … If you provide any type of stipend or reimbursement then you could be penalized $100 per employee per day…
Since the enforcement of the Affordable Care Act, many of our small business clients have been asking us whether they can continue to reimburse their employees for health insurance coverage or provide a stipend to employees for use towards purchasing insurance coverage. It is not required to provide group health insurance coverage for employers with under 50 employees, but if you decide to be a nice employer and provide a reimbursement plan or Employee Payment Plan (EPP) then you might be violating the ACA standards. Wait, what??? If you violate then you could be subject to a $100 penalty, per day, per employee under Section 4980D. That is $36,500 per employee per year. And yes, that penalty can be applied beginning with January 1, 2014. How does this make sense? You’re not required to provide group coverage, but if you provide a reimbursement plan or EPP then you could be fined? Wasn’t ACA supposed to benefit employees?

Read this helpful article from Forbes for the justification behind this rule… Feel free to message us or call with questions for guidance.

Transactions run through Paypal and Venmo not subject to 1099 rules?!

Paypal and other credit card merchant processors are not required to issue 1099’s to payees, unless they received $20,000+ AND had more than 200 transactions… Whereas any other payer is required to issue a 1099 to a payee if they paid them $600 in the ordinary course of business. This DOES NOT change the fact that you are still required to report all this income as a payee.

Loophole? Sounds a little bizarre??

Read full article here.

Million dollar question, buy or lease?

Should I buy or lease a car? The million dollar question.

Here is a simple article that will break down the financial differences between leasing and buying a car. After understanding the financial aspect you can take personal factors and preferences (such as how often you want a new car) into consideration then make a decision. For businesses, there could be certain tax advantages and disadvantages that are not covered by this article, feel free to contact us for a consultation about this.

Read full article here.