This presentation highlights the top 5 tax things you need to know for 2014 if you're in the lodging industry. This high level discussion means you can leave your slide rule and pocket protectors at home! We will focus on how you can put real money back into your pockets.

1. Big Tax Ideas that Save Real Money
Gerry Adams, CPA
Tax Partner
Richard Finafrock, CPATax PrincipalAllison Gillette, CPATax ManagerMarney Zellers, CHAEHospitality Advisor November 10, 2014

2. The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.
Disclaimer

3. Outline
1.
Section 179 Election & Bonus Depreciation
2.
Capitalization Policies & Repair Regulations
3.
Washington State Excise Taxes
4.
Tips and Service Charges
5.
Personal Property Taxes

4. Section 179 & Bonus Depreciation

5. IRC Section 179 Election
•
Businesses can elect to expense part or all of the cost of new or used qualified property subject to limitations.
•
Income Limitation
•
Entity Level
•
Individual Level
•
Investment Limitation
•
Maximum spending on asset additions during the year
•
Phase-outs

6. IRC Section 179 Election
$200,000
$400,000
$410,000
$420,000
$430,000
$500,000
$800,000
$2,000,000
$200,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Investment Limitation
Investment Limitation

7. IRC Section 179 Election
$20,000
$24,000
$24,000
$100,000
$102,000
$105,000
$108,000
$125,000
$250,000
$500,000
$25,000
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Maximum 179 Expense
Maximum 179 Expense

8. Bonus Depreciation Allowance
•
Businesses have been allowed an accelerated treatment to expense a percentage of the adjusted basis on qualified property purchases.
•
Qualifying property
•
Original use begins with taxpayer
•
Depreciable property with a 20 year or less life
•
Taxpayers must elect out in order to not claim this allowance on property class types.

9. Bonus Depreciation Allowance
0%
30%
30%
50%
50%
0%
0%
0%
50%
50%
50%
100%
50%
50%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Bonus Depreciation
Bonus Depreciation

10. Asset Lives
**Expired December 31, 2013
PropertyDescription
Tax Life
Eligible forSec. 179 or Bonus**
Furniture
7 years
Yes
RestaurantFurniture
5 years
Yes
Fixtures
7 years
Yes
Equipment
5 years
Yes
Software
36 months
Yes
Building
39 years
No
Improvements
39 years
No
Qualified Leasehold Improvements**
15 years
Yes
QualifiedRestaurant Property**
15 years
Yes

11. Capitalization Policies & Repair Regulations

12. Capitalization Policies
•
New IRS regulations
–
Safeharbor Capitalization Policy –
•
New Additions/Purchases
–
Election is made on each year tax return
»
Companies with applicable financial statements is $5,000
»
Companies applicable financial statements is $500
•
Materials and Supplies
–
Safeharborfor purchases is $200
•
Smallwares
Safeharbor: Provisions in a regulation that affords protection from a liability or penalty under specific situations or if certain conditions are met.

13. Expense or Capitalize
•
Betterment or Improvement:
–
extends the life,
–
increase the capacity, or
–
improve the efficiency or safety of the property
•
Unit of Property
–
Building structure
–
Building systems –Defined 8 systems:
-
All Elevators
-
Fire Protection System
-
Security System
-
Gas Distribution System
-
HVAC
-
Plumbing System
-
Electric System
-
All Escalators

14. Expense or Capitalize
EXAMPLE
Assumptions:
•
Building acquired 1999
•
Room renovation occurred in 2010
ORIGINAL TAX TREATMENT
2014 ->
12/31/13
12/31/13
Annual
Accumulated
Undepreciated
Depreciation
Cost
Depreciation
Cost
Expense
Original Building -1999
10,000,000
(3,846,150)
6,153,850
256,410
Room renovation -2010
2,000,000
(205,128)
1,794,872
51,282
Totals
12,000,000
(4,051,278)
7,948,722
307,692

15. Expense or Capitalize
EXAMPLE
Assumptions:
Building acquired 1999
Room renovation occurred in 2010:Determined that $500k of renovation was for "betterments”
TAX TREATMENT UNDER NEW REGULATIONS
2015 ->
12/31/13
12/31/13
Annual
Accumulated
Undepreciated
2014
Depreciation
Cost
Depreciation
Cost
Expense
Expense
Original Building -1999
10,000,000
(3,846,150)
6,153,850
256,410
256,410
Room betterments -2010
500,000
(51,282)
448,718
12,821
12,821
Rooms "refresh" -2010
1,500,000
(153,846)
1,346,154
1,346,154
-
Totals
12,000,000
(4,051,278)
7,948,722
1,615,385
269,231
Expense under Original Treatment
307,692
307,692
Difference
1,307,693
(38,461)

16. Repair Safeharbor
•
Building Repair Safeharbor
–
Maintenance performed isreasonably expectedto occur more than once during a 10 year period can be expensed
•
Other Property Safeharbor
–
Maintenance performed is reasonably expected to be performed more than once during the property’s life class can be expensed

17. Disposals
•
Final regulations issued by IRS in August 2014
–
Effective for tax years that begin on or after 01/01/2014
–
Can adopt for tax years that being on or after 01/01/2012 (options)
•
Retirement of structural components of a building –Partial disposition
•
O.K. to use any reasonable method to determine basis of retired asset
–
Cost segregation study
–
Discounted cost using the Producer Price Index

18. Disposals
* Question: Is this amount "reasonable"?
-
It represents the cost of a new roof in 2011
-
How long should the roof last?
-
Should a "condition factor" be considered?
PARTIAL DISPOSITION EXAMPLE
Assumptions:
Building acquired in 2011
Roof replaced in 2014 for $200,000
New roof of comparable type to old
Capitalize cost of new roof
$200,000
Depreciate over 39 years
Basis of old roof ($200k discounted back 3 years)
$186,000
Expense in 2014 *

19. Washington State Excise Taxes

20. Common Paymaster –Shared Costs
•
Common paymaster taxation treatment
•
The requirements for a deductible advance or reimbursement are:
Requirements:
–
Funds are received as the agent of a customer or client
–
Use of funds to pay third parties is solely that of an agent
–
The taxpayer receiving the advances or reimbursements does not or cannot render the services provided
–
The taxpayer receiving the advances or reimbursements does so in the normal course of business

21. Common Paymaster –Shared Costs
Record Keeping Requirements:
•
There are certain record keeping requirements
–
There must be a contract or agreement between the parties clearly defining the relationship
–
The books and records of the agent must show the transactions were made in the name and for the account of the principal and the actual buyer for whom the purchase was made
–
The books and records of the agent must show the gross sales, the amount of any commissions and any other incidental income derived by the agent from such sales

22. Common Paymaster –Employee Costs
•
New section added to Washington laws payroll services
–
A deduction is allowed for an employer who provides paymaster services for an affiliated company covering employee costs.
–
However, no exclusion is allowed for any employee costs incurred in the connection with a contractual obligation of the taxpayer to provide services, including staffing services.

23. Common Paymaster –Employee Costs
Summary –Common Paymaster Structures:
•
Decide if these structures make sense
–
Will the company save money?
•
Can the company consistently abide by the requirements of the new rules for employees costs and for shared costs?
–
Contracts are important
–
Liability burden is important
–
Communications are important
•
Will the company operate in substance according to the form of the transactions?
•
Will the company protect itself from future tax liability by seeking letter rulings?

24. Market Based Apportionment
•
Applies to both state and local Business & Occupation tax
•
Local jurisdiction apportionment is different than state apportionment
•
Multiple changes in methodologies since 2006
–
June 1, 2010
–
Market Based versus Cost Based
–
Sales Factor Apportionment
•
Nexus -“Physical presence” in another state is not the test for many businesses
•
Economic nexus thresholds ($267K/53K/53K) only applies to apportionable activities

25. Tips and Service Charges

26. QUESTION
Is it a Tip or a Service Charge?
Service charges differ from tips in the following way:
a)
Tips are subject to the employer matching FICA tax but service charges are not.
b)
Tips can be considered toward minimum wage in states with a tip credit while service charges may not.
c)
Service charges belong to the employer while tips belong to the employee.
d)
All of the above.

27. Tips vs. Service Charges
Tips vs.Service Charges -Defined
Tips
ServiceCharges
Payment is free from compulsion
Paymentis required
Customer has unrestricted right to determineamount
Amount is determined by someoneother than customer
Generally,the customer has the right to determine who receives the payment
Someoneother than the customer determines who receives the payment

28. Tips vs. Service Charges
Tips vs.Service Charges -Treatment
Tips
ServiceCharges
Reported to IRS as tip income and eligiblefor the FICA tip credit
Reportedto IRS as wages and not eligible for the FICA tip credit
Legally belong to the personfor whom the customer intended payment. Employer distribution of tips to those other than said person are limited.
Legallybelong to employer. Treated as income and subject to sales tax in applicable states. Employer retention and distribution of payments more liberal.
Count toward meeting minimumwage requirement in states with tip offset (tip credit)
Count toward meeting minimumwage requirement in states with tip offset (tip credit)
Included in hourly rate used to determineovertime rate

29. Tips vs. Service Charges
Automatic Gratuity
•Commonlyreferred to as “Auto Grat”
•Commonly addedto restaurant checks of larger parties
•Automaticgratuity policies are commonly written on menus and verbalized by front desk staff
•IRS Rev. Ruling 2012-18declares auto grat to be a service charge, not a tip

30. Tip Reporting
When declaring tip income, the IRS requires an employee report:
a)
At least 8% of the employee’s total sales
b)
10% of the employee’s total sales or 100% of credit card tips, whichever is higher
c)
100% of credit card tips plus 10% of the employee’s cash sales
d)
None of the above
QUESTION

31. Tip Reporting
Tip Reporting -Requirements
Employee
Keep adaily record of tips and sales
Employee who receive $20 or more in tips, either directly or indirectly, in a month must report all tips to the employer by no later than the 10th day of the following month. (Employers may require employees to report tips more often.)

32. Tip Reporting
Tip Reporting -Requirements
Employer
Collectemployee tip reports
Withholdand pay Social security, Medicare and federal income taxes on all employee tips
Employersmust match employee’s Social Security and Medicare taxes on all employee tips (NOTE: this is true whether or not the employee reports the tips)
When preparing an employee's Form W-2, include wages, tips and other compensation in the box labeled "Wages, tips, other compensation." Include Medicare wages and tips, and social security tips in their respective boxes.
When figuring the employer's liability for federal unemployment tax, add the reported tips to the employee's wages.
Allocate tips to any directly tipped employees who reported tips of less than 8% of his or her sales.
File Form 8027 if tipping is customary,food and drink are provided for consumption on premisesand
the business employs more than 10 employees or the equivalent (more than 80 employee hours per day) on a typical day.

33. Tip Audits
TRUE
or
FALSE
In a tip income audit, the IRS focuses solely on recovering income tax from employees who underreport their tip income.
QUESTION

34. Tips Audits
Tip Audit Facts
The IRS has the right to audit at least as far back as three years -further, if the agency believes it's a case of fraud. Some restaurant servers have even been jailed for tax evasion.
Courts continue to hold that the IRS may use indirect and aggregate methods for determining underreported tip income in audits where employee tip reporting records are incomplete or in employer-only audits.
In an employer-only audit, the determination is made through an observation that the overall rate of tips for a restaurant is not high enough.Audits are made withoutauditing the employees of the restaurant.
Along with requiringemployers to pay their share of FICA taxes on underreported tip income, the IRS mayalso assess penalties to employers equal to the EMPLOYEE portion of FICA taxes.

35. Tips Audits
Triggeringa Tip Audit
RedFlags
Percentage oftotalreported tips relative to totalsales is below industry average
Creditcard tips reported on form 8027 exceed total tips declared to employer by employees
Percentageof reported cash tips relative to cash sales is significantly lower than that of credit card tips to credit card sales

36. Best Practices
Common Issues
Issue
Best Practices
Autogratuity is common in your business. Reduced FICA tip credit would have a major impact on operating income.
•Considerreducing use of auto gratuity and printing suggested tip amounts on guest checks
•Retain a portion of the auto gratuity for the house
Employeesunderreport tips
•Strong policyincluding tip allocation policy
•Tip reporting training and education
•Tip Agreements (TRDA, TRAC, emTRAC)

37. Personal Property Taxes

38. Personal Property Taxes
Think about these questions:
•
Has there been significant new investment in equipment, furniture or fixtures?
•
Does the fixed asset list include older assets that may no longer be physically present?
•
Are you reporting the full capitalized cost for tangible personal property?
•
Has a cost segregation study been performed?
•
Have the assets been the subject of a purchase price allocation?
Answering “yes” to any of the above, could warrant a PPA review.

39. Personal Property Taxes
Issues to consider:
•
Real vs. Personal property: Classification of assets may differ for PPA purposes vs federal tax
•
Sales tax, freight, installation, and warranties: May or may not be includible in cost
•
Economic obsolescence: Market sales may indicate cost less depreciation is more than FMV calculated
•
“Ghost assets”: Assets disposed of, but still included on the PPA

40. Questions?
Thank you for attending!
Contact Information:
Gerry Adams-gadams@pscpa.comRichard Finafrock-rfinafrock@pscpa.com
Allison Gillette-agillette@pscpa.com
Marney Zellers-mzellers@pscpa.com