Monthly Archives: April 2013

Special Rule for Deducting Restaurant Smallwares

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Business owners who buy assets that have useful lives longer than one year usually cannot immediately deduct the costs of these assets.  The costs have to be deducted over a number of years through depreciation.

Luckily for restaurant owners, there is an exception that allows restaurant owners to immediately deduct the costs of smallwares in the year they are purchased and used.

What Are Smallwares?

Smallwares include the following items:

  • Glassware
  • Flatware
  • Dinnerware
  • Pots and pans
  • Table top items
  • Bar supplies
  • Food preparation utensils and tools
  • Storage supplies
  • Service supplies
  • Small appliances that cost $500 or less individually

This Provision Helps Other Food Services Businesses, Too…

This provision applies to corporations engaged in the business of preparing food and beverages to customer order for immediate on-premises or off-premises consumption.  In addition to restaurants and cafeterias, this provision also applies to caterers, mobile food servers, bars and taverns, and food or beverage services located in grocery stores, hotels and motels, amusement parks, theaters, casinos, country clubs, and similar social or recreational facilities.

Watch Out for These Traps

There are two situations where an immediate deduction will not be available and the business owner will have to deduct the costs of smallwares over a number of years.  The situations are:

  • When the smallwares are purchased before the business begins operations.  In this situation, the smallwares are treated as start-up expenses.  Start-up expenses of up to $5,000 can be deducted the year business operations begin.  Excess start-up expenses are deducted over 15 years.
  • When the smallwares are purchased and stored, rather than put to immediate use.  In this situation, the smallwares are treated as inventory and become deductible when they are put to use.

Example:  Janson Family Restaurant will open to the public in July 2013.  Prior to its opening, it buys $10,000 of smallwares.  Later during 2013, it buys $5,000 of additional smallwares.  During 2014, it buys an additional $4,000 of smallwares.  Finally, during the last week of 2015, it buys $10,000 of smallwares, but keeps them in storage until 2016.

Janson Family Restaurant can deduct the costs of smallwares as follows:

  • The $10,000 of smallwares purchased before opening are treated as start-up expenses.  It can immediately deduct $5,000 and deduct the remaining $5,000 over 15 years.
  • The $5,000 of additional smallware purchased in 2013 after the restaurant opened are fully deductible in the year of purchase
  • The $4,000 of smallwares purchased during 2014 are fully deductible in the year of purchase
  • The $10,000 of smallwares purchased during 2015 must be recorded as inventory in 2015 since the smallwares aren’t being used.  The $10,000 will be fully deductible in 2016 once they are used.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Which Employees Are Full Time Under the Affordable Care Act?

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The penalty for employers with 50 or more full time employers who don’t offer affordable health insurance to their full time employees takes effect in 2014.  30 hours per week is full time.  On a monthly basis, employers will have to determine if they have 50 or more full time employees.  For this purpose, full time employees are determined on a full time equivalent basis.

Example:  ABC Corp has 45 employees who work 30 hours per week.  It also has 10 part time employees who work 15 hours per week.    To determine the number of full time equivalents:  multiply 10 employees by 15 hours per week and divided by 30.  This equals 5 full time equivalents, which is added to the 45 actual full time employees.  Since this employer has 50 full time employees, it is subject to the penalty.

However, the employer only has to provide health insurance for employees who actually work 30 hours per week.  It does not have to provide health insurance for part time employees.

Figuring out which employees work 30 hours per week is more difficult that you would think since employees’ working hours may change from week to week.  Additionally, some employees may leave for a period of time and then come back.  The IRS has provided procedures that employers can use to determine if an employee is a full time employee.  There are different tests for existing employees and for new employees.  This post will cover the test for existing employees.

The procedures involve three main time periods:

  1. Measurement Period:  Employees who average 30 or more hours per week during a measurement period are full time employees who must be offered health insurance during the subsequent stability period.
  2. Stability Period:  This is the period of time during which the employee must be offered health insurance.
  3. Administrative Period:  This period of time exists between the measurement period and the stability period.  Employers will need time after the end of a measurement period to determine which employees are full time employees, to notify these employees of eligibility, and to complete necessary administrative tasks such as enrolling the employees in health coverage.

Measurement Period

The measurement period must last between 3 and 12 months.  The employer determines when the measurement period begins and ends.  Additionally, the employer may change its stability period length and period from year to year, but generally cannot change a measurement period once it begins.

Example:  XYZ Corp uses a five month stability period of April 1 to August 31 of 2013.  In 2014, it may use a six month period between April 1 and September 30.  However, it would have to change the measurement period before April 1, 2014 because it cannot change a measurement period once it begins.

An employer can use measurement periods that differ in length or that differ in start/end dates for the following categories of employees:

  • Salaried employees and hourly employees
  • Employees whose primary places of employment are in different states
  • Collectively bargained employees and noncollectively bargained employees
  • Each group of collectively bargained employees covered by separate collective bargaining agreements

Stability Period

Each employee who is determined to be a full time employee during the measurement period must be offered health insurance coverage during the stability period.  A stability period must last at least 6 months, but cannot be shorter than the measurement period.  The employer can change a stability period from one year to the next, but it cannot change a stability period once it has begun.

An employer can use stability periods that differ in length or that differ in start/end dates for the following categories of employees:

  • Salaried employees and hourly employees
  • Employees whose primary places of employment are in different states
  • Collectively bargained employees and noncollectively bargained employees
  • Each group of collectively bargained employees covered by separate collective bargaining agreements

An employee who is a full time employee during the measurement period must be offered health insurance throughout the stability period regardless of the number of hours the employee works during the stability period.

Example:  ABC Corp has a measurement period of April 1, 2013 to October 1, 2013.  It then has a ninety day administrative period.  It has a one year stability period of January 1 to December 31.  Timmy averages 30 hours per week during April 1, 2013 to October 31, 2013, and is therefore a full time employee during the measurement period.  During the 90 day administrative period from October 2, 2013 to December 31, 2013, ABC Corp tests which employees average 30 hours or more, and enrolls eligible employees in health coverage which lasts during the one year stability period from January 1, 2014 to December 31, 2014.

Beginning February 1, 2014, Timmy starts working 20 hours per week consistently.  Even though Timmy is now a part time employee, his health coverage must last throughout the entire one year stability period from January 1, 2014 to December 31, 2014. 

However, during the 2014 measurement period, Timmy will only average 20 hours per week.  He will not have to be offered coverage during the 2015 stability period.

Employees Who Leave & Come Back

When employees leave for a period of time and then resume employment, it is questionable whether they should be treated as an existing employee (rules discussed in this blog) or a new employee (rules discussed in a future blog).

If an employee does not work for at least 26 consecutive weeks and then returns to work, the employer can treat the employee as a new employee.  Any hours the employee worked during the measurement period prior to the leave do not count (i.e., the hours are reset when the employee resumes employment).

If an employee is on leave (or quits) and resumes employment within 26 weeks, the employer treats the employee as an existing employee and hours worked within the measurement period before the leave are counted.  Since the employee will have zero hours during the period of absence, the period of absence will lower the employee’s average hours worked per week. If the absence is long enough, the employee’s average hours per week will likely fall below 30, and the employee will be ineligible for health coverage.

However, for special unpaid leave, the employer excludes the absence period from the average hour calculation so that the average hours may not fall below 30.  Special unpaid leave is unpaid time from work subject to the Family Medical Leave Act, jury duty, or under the Uniformed Services Employment and Reemployment Rights Act (USERRA).

 
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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Renting Out Your Old Home? Avoid This Tax Trap!

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Homeowners pay real property taxes on their homes.  Principal residences are exempt from the 18-mill tax for school operating purposes.  This reduction in property taxes is known as the homestead exemption—not to be confused with the Homestead Property Tax Credit which is a refundable tax credit claimed on Michigan income tax returns.

The 18-mill exemption reduces a homeowner’s property tax bill by 1.8% of the home’s taxable value.

Example:  Joan buys a home for $200,000.  The home’s initial taxable value is $100,000.  The total property taxes on her home equal 56 mills.  Her total property taxes for the year are $5,600.  However, since Joan uses the home as her principal residence, she qualifies for the homestead exemption which reduces her millage by 18 points down to 38 mills.  Her total property taxes with the homestead exemption are now $3,800 (saving her $1,800 dollars)

The homestead exemption applies only as long as the home is being used as a principal residence.  When the home is no longer used as a principal residence, the homeowner has to notify the assessor that it is no longer her principal residence.  The assessor will then remove the homestead exemption and increase the millage by the 18 mill school operating assessment.

When homeowners move out of their principal residences and rent it out, they must be sure to notify the assessor that the home is no longer being used as their principal residences since the homes are now rented out. 

Example 1: Same facts as above, except that Joan buys a new home and rents out the old one.  Joan will claim a homestead exemption on the new home and must relinquish the homestead exemption on the old home.  Her property taxes on the old home will increase.  She should increase the rent she is charging the tenant to cover this increase in property taxes.  

Failing to notify the assessor will result in the assessment of back taxes (the 18 mill school operating assessment) against the homeowner plus penalties and interest.

Example 2: If Joan decides not to notify the assessor, she risks the assessor finding out that the old home is rented.  The assessor will assess back taxes for the years the home was rented with the homestead exemption in place.  Joan will also be subject to penalties and interest.  

There is an exemption for people who are no longer using their homes as a principal residence because they are on active duty in the military.

There is also an exemption for people who are selling the home if the home remains unoccupied and for sale for up to three years.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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