3 Common Mistakes Made on Restaurant Tax Returns
Feb 21, 2020
It’s scary to hand over control to someone who doesn’t know your business as well as you do, but also has expertise you have to count on. That is exactly what happens between an accountant and a business owner. You rely on your accountant to make important decisions about your taxes based on their knowledge of the tax code, but also hopefully based on knowledge specific to your business.
This leaves many business owners with anxiety about their tax returns and a lack of understanding of why they pay so much in taxes when they felt like they didn’t even make any money.
Unfortunately, many times your business tax return can contain material errors that can cause you to owe more in taxes each year. To help you avoid these, below are three common mistakes and tips on how to correct them on your 2019 return :
- How sales are being reported: This is a key question to ask your accountant or bookkeeper as it is the basis for your annual return as well as your monthly sales and use tax filing. If this number is wrong, the chances are high that your sales and use taxes are incorrect as well as your annual return.
How do you know if this number is right?
- Your revenue on your profit and loss statement (P&L) should match your NET sales on your POS return + third party delivery sales if these sales are not recorded in your POS. The key question is what this number should NOT include, as so many times we see the revenue on a P&L matches the deposits on the bank account, which is a recipe for disaster in the accounting world. Here is what should NOT be included as revenue on your P&L.
- Tips – tips collected are NOT revenue to the business as long as they are paid out to your employees. This may sound like a simple statement, but if your business accepts credit card tips, then those tips ARE included in your daily deposits. If your bookkeeper or accountant isn’t matching your revenue to the sales on your POS system, chances are these tips are included in your revenue line.
- Sales tax collections – similar to tips, sales tax collected is NOT revenue to your business as long as you are paying out the sales tax to the state in your sales and use tax return. If your bookkeeper or accountant is not matching to the POS system, chances are sales tax collections are included in your revenue line on your P&L.
- Third party delivery sales – in many cases third party delivery services have started collecting sales tax on your behalf. But if these sales are not recorded correctly, it is possible that you are paying your state sales tax on these third-party sales twice.
- How is your payroll being reported? Similar to revenue, it is important to make sure that your bookkeeper or accountant is reporting the correct amount for payroll expenses.
- Your Payroll or wage expenses on the P&L should include all wages and bonuses paid to your employees as well as the employer portion of taxes. But what should this amount NOT include:
- Tips – similar to the revenue side, tips paid out to your employees is NOT an expense to the restaurant and should not be included in the expense line on your P&L.
- Employee advances – if an advance is paid to an employee this is NOT an expense to the business; this is a short-term loan to your employee and should be listed on your balance sheet as money due to your business at a later date.
- Garnishments – garnishments are removed from your employee pay but ultimately paid into the respective state agency. These should be removed from payroll expenses and listed on your balance sheet as money due to the state agency.
- Owner contributions to the business: Has your bookkeeper or accountant accurately reported all money put into the business this year? It is critical to make sure you review your owner contribution account each year prior to filing your taxes. This is your basis in the business,and the key number used to calculate if any business losses are able to be used on your tax return this year.
As you can see, there are so many details to cover prior to finalizing a business tax return. This is why our model of monthly accounting performed by an experienced CPA results in substantial tax savings to many of our clients.
If you would like to learn more about how The Largo Group can save you time and money in 2020, please feel free to set up an introductory appointment using the link below.
Our initial consultation is free, and we are happy to help make sure your next tax return is correct!
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If you'd like to learn what successful restaurant owners know about accounting, download our free report, "How to Avoid the 5 Pitfalls of Restaurant Accounting." Be on your way to becoming an expert on your business's accounting and have confidence in your accounting decisions.
Author: Anne Gannon, founder and principal of The Largo Group.