The Domestic Production Activities Deduction: An Untapped Savings Opportunity for Restaurants?

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Many taxpayers in the restaurant industry may not be aware that they may qualify for a significant tax deduction available under section 199.

Fully phased in for tax years beginning in 2010 and thereafter, section 199 provides a permanent tax deduction (the “domestic production activities deduction” or “DPAD”) to taxpayers deriving income from qualified production activities occurring in the United States.

The DPAD is computed as the lesser of the following three amounts:

  1. Nine percent of the taxpayer’s qualified production activities income (“QPAI”)
  2. Nine percent of taxable income for the year
  3. 50 percent of the taxpayer’s W-2 wages related to the qualifying production activities

QPAI is principally net taxable income derived from qualifying activities, equal to the excess of the taxpayer’s domestic production gross receipts (“DPGR”) over the sum of the cost of goods sold (“CGS”) and other expenses, losses or deductions that are properly allocable to such receipts.

While many taxpayers tend to think the DPAD only applies to traditional manufacturers, the benefit may be available to a number of other industries as well.

Section 199 broadly defines manufacturing to include activities such as making tangible personal property from new or raw material: processing, manipulating, refining or changing the form of an article; or combining or assembling two or more articles.

This definition can include the preparation of food and beverages, as such activities typically involve combining various articles to make a distinct finished product.

However, section 199 specifically excludes gross receipts of the taxpayer that are derived from the sale of food or beverages prepared by the taxpayer at a retail establishment from DPGR.

A retail establishment is defined as tangible property at which retail sales are made that the taxpayer owns, leases, occupies or otherwise uses to sell food or beverages to the public.

Furthermore, a facility that prepares food and beverages for take-out service or delivery is considered a retail establishment for purposes of section 199.

Accordingly, a restaurant that prepares food onsite from start to finish or a caterer may not qualify for the benefit.

Restaurants may still benefit from the section 199 deduction to the extent any portion of the food preparation occurs at an off-site facility. For example, many chain restaurants use a central kitchen to prepare food products and ship them to its various locations for final preparation and sale to the customer.

For these restaurants, the gross receipts attributable to the food preparation occurring off-site can be treated as DPGR, with the remaining gross receipts attributable to the on-site preparation of the meal treated as non-DPGR.

Off-site preparation of beverages also benefits under the same principle.

In a 2004 conference report discussing the various applications of section 199, Congress noted that although a beverage prepared at a retail establishment, such as a cup of coffee, would not qualify under section 199 in its entirety, a component of the beverage may be treated as qualifying property.

For instance, if a portion of the coffee was prepared off-site, such as roasting the coffee beans, then that specific portion could qualify for the deduction.

A taxpayer’s off-site facility is not a retail establishment if the taxpayer only uses it to prepare food or beverages for wholesale.

Additionally, a retail establishment does not include the bonded premises of a distilled spirits plant or wine cellar or the premises of a brewery (other than a tavern on the brewery premises).

Thus, any gross receipts derived from products produced at such locations and sold to customers (whether the sales occur on-site or off-site) can qualify as DPGR.

Qualifying activities for purposes of the DPAD are wide-ranging and applicable to taxpayers in numerous industries, including the restaurant and beverage sector.

As the rules under section 199 can be quite complex, it is prudent for taxpayers to work with their tax advisers to obtain a thorough understanding of the facts at hand in order to determine whether they may qualify for the incentive.

Note also that taxpayers may amend prior year returns (to the extent such years remain open under the statute of limitations) for any unclaimed section 199 deductions, further increasing their cash tax savings and reducing their effective tax rates.

This post was contributed by Dana Zukofsky and Travis Butler of Restaurant365 partner, BDO.

Why take the time to create a budget for my restaurant?

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These are the Big 3 Benchmarks of Performance in the Restaurant Industry:

  1. Same-Store Prior Year
  2. Location Side-by-Side
  3. Budget

 What are the merits of each and is doing a budget even worth it?

The most common financial and operational benchmark for a restaurant is comparing performance of the same store to the same time period of the previous year.

This is known as ‘Same-Store _______________” (you insert the metric you want – i.e. Sales, Guest Count, SPLH, Prime Profit, etc.)

Same-Store Prior Year is an important metric to be sure as it can alert an operator of things that have fallen out of the normal ratio for that same-store and thus where immediate action should/can be taken to rectify it.

Each location is unique to some degree and when all else is equal, the same-store performance the previous year is a great way to measure current year performance. However, it does have its limitations.

For example, one industry veteran told me his staff would commonly joke that if you wanted to make any poor performing period look good, just make the previous year look the same and no one would bat an eyelash. There is a need to look at your business through multiple lenses.

The second most common analysis in the restaurant world is comparing store performance to other restaurant locations within the same company for the same time period. This is referred to a Location Side-by-Side analysis.

This form of performance comparison is also helpful in identifying warning signs and opportunities across your multi-unit brand but the greatest benefit is an intangible one: it can drive manager motivation. People love to compete. They like seeing their store at the top.

Restaurant365 is one application that has taken this to the next level. They have an exciting feature that allows managers to see the P/L’s of other locations within the company without revealing which location they are looking at except their own. The manager can see where they ‘rank.’ This gamification of the data is helping promote excellence within the manager ranks and changing the tone of weekly manager meetings for the better.

The third benchmark restaurants use to measure performance is against a budget. There are many reasons people take the time to prepare a restaurant budget each year – and there are many people who purposefully don’t take the time. For those that do, it is often done out of compliance for an outside investor and completed by the CFO or accounting department. For those that don’t, a common excuse we hear is, “I don’t have the time to analyze any variances.

Besides, the minute I complete my budget it is obsolete and irrelevant because of the ever changing nature of my business.”  There is some truth in these comments and realities we cannot deny.

Why then, go to the trouble of preparing a restaurant budget and who should do it? The best answer is because of what it teaches the person who does it and secondly, everyone from the restaurant manager on up.

The exercise of preparing a budget teaches you the business. In other words, it reveals how the business makes money or loses it. There are ‘levers’ in the business that when pulled, drive profits or losses. Restaurant managers who understand these ‘levers’ are in the best position to make recommendations to the company on how to control them.

Managers who help create the company plan as to how to use the ‘levers’ have more buy-in and ownership to the results. Luck will always be on your side when managers are fully bought-in.

In the end, is budgeting worth it? It is not only worth it, but when combined with same-store prior year and location side-by-side analysis, it is critical for all restaurant business hoping to maximize their return on capital.

Morgan D. Harris CPA, Co-founder, Restaurant365

 

The 4 “Anchors” of Restaurant Reporting

There are so many moving parts to running a restaurant, managing by exception is really the only way to identify what part of the business needs the most attention.  So how do you know what is an exception?  In the restaurant business, there are 4 things you can compare your numbers to that will tell you what you can work on.  They are:

  1. Same Store Last Year 
  2. Budget / Theoretical
  3. Other Stores
  4. Industry Benchmarks

Which of these should you be looking at?  It totally depends on which aspect of your business you want to focus on.  There are also 4 key metrics in restaurant accounting you will be most interested in – Sales, Cash, Cost of Goods Sold, and Labor. 

Restaurant365 provides a simple and methodical way of looking at these metrics against these anchors to lead you to the biggest problems first.  If you can work your way down the list of issues, you will soon find that there is more money in your bank account.  Powerful restaurant accounting software such as Restaurant365 will help you run a more profitable business. 

Morgan Harris  |  Co-founder  |  Restaurant365

How Can Restaurant Accounting Software Help My Business?

I found myself in a conversation today with a restaurant professional discussing the merits and benefits of restaurant accounting software over generic accounting software.  The key difference is how it specifically helps restaurants achieve their objectives of:

1.  Protecting assets

2.  Identifying opportunities and trouble

3.  Increasing profitability without lowering customer service

What tool can help the restaurant business owner achieve these?  The answer is restaurant-specific ERP software such as Restaurant365. 

  • Precious assets such as time, inventory, & cash are monitored and controlled tightly
  • Trends, variances, and outliers are displayed clearly in easy to use reports
  • The system does the work of multiple people, thereby reducing administrative overhead 

Take you business to the next level with Restaurant365.

Morgan Harris  |  Co-founder  |  Restaurant365

What is a Restaurant Accounting ‘System’?

I often find myself helping CPA’s explain the value of having a restaurant specific accounting solution to their clients.  Why?  Mostly because QuickBooks is free.  And when compared to that, it’s very difficult to get a restaurant owner to spend money on something he is currently spending nothing on.  So, in an effort to paint the bigger picture, I often reply to my CPA friends in the following way (this is an actual email I sent out this morning to a CPA that is trying to win over a prospect with 3 restaurants):

Dear Jane (not real name),

I understand your prospect is pushing back on the cost of Restaurant365.  When speaking with him next, be sure to dive into the details of how his process works today. Once you add up all the time spent manually doing things that are automated with Restaurant365, it is actually going to save your client money.  Much of the savings comes from not having to re-enter data nor reconcile data from two pieces of software at month end.

Keep in mind that a ‘system’ includes: a process, the people involved (payroll $), and the software they use to complete tasks as part of the process. That entirety is ‘the system’. Once you add up what people are really doing, I am betting that their system today is much more expensive than a system using Restaurant365.

Kind regards,

Morgan

 

Morgan Harris  |  Co-founder  |  Restaurant365

3 Key Take Aways from the 2013 Restaurant Finance & Development Conference

We had a great time at the annual Restaurant Finance & Development Conference in Las Vegas this year.  3 key take-aways were:

  1. The attendees are the best part of the conference.  If you go to the show, make sure you say hello to the person sitting next to you.  They are full of knowledge and experiences that are often just as good or better than anyone on stage. 
  2. Restaurant executives care about their team members.   Despite any advance in technology or legislation that might encourage otherwise, executives don’t want to reduce headcount.  They love and depend on each team member and it shows.
  3. Restaurant Accounting Software is a hot-topic.  It was fun to sit in a few sessions and hear people talk about their desire to move to the cloud with their accounting software. 

It was great to connect with old friends and meet lots of new ones.  Restaurant365 is a great conversation starter.  There is nothing I love more than talking with folks about how Restaurant365 can save them administration time, see their business more clearly, and get greater control over their assets. 

Morgan Harris  |  Co-founder  |  Restaurant365

Restaurant Specific Accounting Software Alternatives

Whenever I speak to multi-unit CFOs who are looking for an alternative to QuickBooks and generic accounting software packages, I find myself explaining the following to them:

Basically, there are 3 options:

  1. Restaurant365 (www.restaurant365software.com)  – Accounting, POS Integration, Above Store Analytics (all in one, Cloud Based)
  2. Compeat (www.compeat.com)  – Accounting, POS Integration, Above Store Analytics (all in one, On-Premise)
  3. Outsource it to an outside firm – there are a number of these services out there that do it all on their own proprietary software (cost can be about $250/week/location)

You might find other bits and pieces of the solution (such as Above Store Only – i.e. CTUIT) but there is no other solution that does the full GL and allows you to replace QuickBooks entirely other than what is listed above.

Also, you might explore bundled packages but those are not built specifically for the restaurant industry and will be lacking in features and not really do anything for you more than what you have today (i.e. Great Plains, MAS90, Intacct, NetSuite).

Morgan Harris  |  Co-founder  |  Restaurant365

3 Reasons a Restuarant CFO Should Be Paying Attention To Cloud ERP

Why should a restaurant CFO be concerned about the deployment method of the software his/her team uses to collect and account for data?  There are 3 main benefits to Cloud ERP Computing that are directly in line with the overall objectives the CFO has responsibility for:

  1. Accurate and Timely Information
  2. Control Over Liquid and Perishable Assets
  3. Administrative Efficiency

A cloud based ERP accounting and operations solution such as Restaurant365 (www.restaurant365software.com) provides organizations with a whole new level of sophistication without added effort.  Having your data in the cloud enables you to gather and distribute information across your entire organization seamlessly.  Here are three quick examples of each of the benefits listed above:

  1. Weekly prime cost reports in the hands of the general managers at the stores enable them to stay within budget as they know how they are doing as the period progresses
  2. On-line manager log books require managers to account for and explain overtime, sales ticket exceptions, and food variances
  3. Nightly POS integration that auto-creates the daily sales journal entry in the General Ledger saves manual labor time

Learn more about how Restaurant365 provides multi-unit restaurant businesses with timely information, control over assets, and administrative efficiency at www.restaurant365software.com.

Morgan Harris |  Co-founder  |  Restaurant365  

Noticeable Excitement Surrounding Restaurant ERP

We are excited about the industry right now – based on the calls we are getting, it seems like there are an increasing number of groups wanting to get serious about or invest in ERP software for their restaurant business.  It’s a good sign when folks have time to think about that aspect of their business. It usually means they are seeing growth or planning for it.

It is exciting to see our customers spend less time on administration and more time on strategic endeavors.   Restaurant365 makes this possible through a series of integration points to your POS solutions, banks, and vendors.  Don’t get left behind on this wave of productivity and focus in the restaurant industry.  Get automated with Restaurant365. 

Morgan Harris  |  Co-founder  |  Restaurant365

Rule #1 – Consistency is King in the Restaurant Business (for Food & Financials)

I drove through McDonald’s this morning on my way to work.  I ordered the Friut and Maple Oatmeal.  for $2.19 out the door, it’s an excellent way to start my day.  One of the reasons I often get this ever so small meal, is because when I stop there, I know that it is going to taste the same (exactly the same) as the last time I had it.  It’s a known entity for me.  I love it.

Consistency in the metrics and financial data of a restaurant is no less important than the food they serve.  In order for numbers to be trusted and relied upon, they have to be consistently prepared and adjusted under the same assumptions as they were last period.  Otherwise, you are comparing apples to oranges and they are of no value.  Also, weakness in accounting procedures (such as manual data entry by humans) can result in variations of data.  Restaurant365 is specifically designed to automate and streamline the way data is collected and reported – thus making your restaurant accounting data as consistent as my fruit and maple oatmeal at McDonald’s.  Visit www.restaurant365software.com to learn more about how the system can help your business achieve excellent reporting consistency.

Morgan Harris  |  Co-founder  |  Restaurant365