YEAR-END UPDATE

Jeff Tubaugh, Tax Managing Director

Vince Stasiulewicz, Assurance Senior Manager

AGENDA

Accounting standards updates

Common accounting issues

Audit efficiencies and expectations

Trump administration – various topics

Tax topics to consider for year-end

ACCOUNTING STANDARDS UPDATE

ACCOUNTING STANDARDS UPDATES

A. ASU 2016-02, Leases

B. ASU 2014-09 and related, Revenue from contracts with customers

C. ASU 2016-04, Recognition of breakage for certain prepaid stored-value products

D. ASU 2016-03, Private Company Council effectiveness dates

E. ASU 2015-05, Customer’s accounting for fees paid in a cloud computing arrangement

F. ASU 2014-08, Reporting discontinued operations

G. ASU 2014-15, Going concern

H. ASU 2015-03, Simplifying the presentation of debt issuance costs

I. ASU 2016-07, Equity method and joint ventures

J. ASU 2016-09, Improvements to employee share-based payment accounting

A. ASU 2016-02, LEASES

• Requires recognition of right-of-use asset and lease liability for all leases

• Lease liability initially measured at the present value of the lease payments,

ROU asset also includes any initial direct costs, lease incentives & prepaid rent

• Retains distinction between finance (capital) and operating leases for income

statement and cash flow presentation purposes

• Retains four-step lease classification test, with the following exceptions:

- No bright lines (90% becomes substantially all, 75% becomes major part)

- Added fifth criteria – specialized nature

- Land now subject to all tests, not just bargain purchase and transfer of ownership

• For operating leases, recognize a single lease cost, calculated so that the cost of

the lease is allocated over the lease term on a generally straight-line basis

• For finance leases, recognize separately interest expense and amortization of

ROU asset

A. ASU 2016-02, LEASES

• Entities with short-term leases (less than 12 months) can exclude right to use

asset and lease liabilities and just expense the rent payments

• Requires the separation of different components to be measured at their stand

alone values* (e.g., a lease of equipment with maintenance included requires

the two to be accounted for separately)

• Effective for fiscal years beginning after Dec. 15, 2018, (public) and beginning

after Dec.15, 2019, (non-public). Early application of the amendments in this

Update is permitted for all entities.

• Upon initial application applied to existing leases, the liability will be the

present value of remaining payments, and the right-of-use asset will be PV

minus any deferred rent on the books

• Can significantly impact bank covenants, etc. Therefore, communication with

lenders and other financial statement users is essential.

* Provides a practical expedient that allows lessees to combine lease and

non-lease components – Note: will result in larger ROU asset and liability

A. ASU 2016-02, LEASES

CURRENT STANDARD – EXAMPLE

• 10 year lease, $1,000/month, monthly payment escalates $100/year. Operating

lease classification.

• Total payments over lease life = $174,000

• Rent expense = $17,400/year

• Current standards require no asset or liability to be booked at lease inception.

The expense from the lease would be recognized on a straight line basis, and

deferred rent would be recorded as payments are made.

After one year:

• Rent expense is $17,400. Cash Payments of $12,000 were made, and deferred

rent is recorded of $5,400

• Net effect on balance sheet after one year = liability of $5,400

A. ASU 2016-02, LEASES

NEW STANDARD – EXAMPLE

• 10 year lease, $1,000/month, monthly payment escalates $100/year. Operating

lease classification.

• Total payments over lease life = $174,000

• Rent expense = $17,400/year

• Assuming 5% discount rate, present value is $132,850

• New standard requires a right-to-use asset of $132,850 and liability of $132,850

to be booked at lease inception. The expense from the lease would be

recognized on a straight line basis. The amortization of the liability and the asset

are recorded.

A. ASU 2016-02, LEASES

NEW STANDARD – EXAMPLE (CONTINUED)

After one year:

• The lease liability is reduced to $127,360 = the PV of the remaining 9 years of

payments (“principal balance”). The RTU asset is amortized by the difference

between the straight line expense of $17,400 less the $6,510 (“interest portion”)

related to the liability for a net amortization of $10,890 to arrive at a net RSU

asset balance of $121,960.

• Note that the net balance sheet position after this year is $127,360 - $121,960 =

$5,400 (just like under the old standard)

A. ASU 2016-02, LEASES

NEW STANDARD – EXAMPLE (CONTINUED)

• Rent expense for first year in journal entry form:

To record the first year of rent on the example lease

Rent Expense $17,400 Straight line, calculated just as before

Cash $12,000 Represents the cash paid

Lease Liability $5,490 Change in present value, taken straight

from “loan amortization” schedule

Right-to-Use Asset $10,890 Remaining difference

A. ASU 2016-02, LEASES

Current vs. New Standard, with a tenant improvement allowance (TIA) of $50,000

for leasehold improvements having a 10-year life

CURRENT STANDARD - EXAMPLE

To book the lease at inception:

Net balance sheet effect is $0 at inception of the lease.

Leasehold Improvements $50,000 To record the improvements

TIA (Deferred Rent) $50,000 To record the TIA

A. ASU 2016-02, LEASES

NEW STANDARD – EXAMPLE

To book the lease at inception:

Net balance sheet effect is $0 at inception of the lease. Note that the differences in the right-to-use

asset and the lease liability is the $50,000 tenant improvement allowance or “deferred rent” under the

current standard.

Leasehold Improvements $50,000 To record the improvements

Right-to-Use Asset $82,850 Reduce ROU asset by value of

leasehold improvements

Lease Liability $132,850 Present value of lease payments, no

change

A. ASU 2016-02, LEASES

CURRENT STANDARD- EXAMPLE (with a TIA of $50,000)

Rent expense for year one in journal entry form:

Straight line rent is now $17,400-$5,000 of TIA amortization per year, or a net of $12,400.

Rent Expense $17,400 Straight line, calculated above

Cash $12,000 Represents the cash paid

Deferred Rent $5,400 Difference between them

TIA (Deferred Rent) $5,000 To record one year of amortization

Rent Expense $5,000 Effect is to reduce rent expense

The balance sheet would show $45,000 of leasehold improvement (net of depreciation). There would be

net deferred rent of $50,400 (TIA of $50,000 - $5,000 amortization + $5,400 deferral of rent payments).

The net balance sheet effect is a liability of $5,400.

A. ASU 2016-02, LEASES

NEW STANDARD - EXAMPLE (with a TIA of $50,000)

Rent expense for year one in journal entry form:

Straight line rent is now $17,400-$5,000 of TIA amortization per year, or a net of $12,400. There is no

change in the way it is calculated.

Rent Expense $12,400 Straight line, calculated above

Cash $12,000 Represents the cash paid

Lease Liability $5,490 Change in present value

Right-to-Use Asset $5,890 Net difference

The balance sheet would show $45,000 of leasehold improvement (net of depreciation), no change. There

would be a right-to-use asset $76,960 and a lease liability of $127,360. The net balance sheet effect is a

liability of $5,400, which is the same as the current standard. Also note, what used to be recorded as the

“deferred rent liability” of $50,400 is now the difference between the right-to use asset and the lease

liability.

B. ASU 2014-09 AND RELATED, REVENUE FROM

CONTRACTS WITH CUSTOMERS

• For restaurant operating entities, the impact is nominal as restaurant food and

beverage revenues are not changed. Still recognized at the time of sale.

• Franchisors will be required to assess the different deliverables contained within

their franchise contracts and recognize revenue as each deliverable is satisfied.

For example, site selection may be separate from use of name/logo, etc.

• Previous rules allowed for recognition of Franchise Fees upon satisfaction of the

initial obligations, which generally meant upon the store opening

• Use of intellectual property (essentially the franchise fee less any separable

components) will now be recognized over the term of the franchise agreement

• Effective date now changed by ASU 2016-03. For public entities it is annual

reporting period beginning after Dec. 15, 2016; non-public beginning after Dec.

15, 2017

C. ASU 2016-04, RECOGNITION OF BREAKAGE FOR

CERTAIN PREPAID STORED-VALUE PRODUCTS

• Previously there was no specific guidance on certain types of gift cards that

existed, this standard clarifies standards and ends diversity in practice

• The guidance applies to the following types of gift cards:

- Cards with no expiration date

- Cards not subject to unclaimed property laws

- Cards redeemable for cash, goods or services at a third party, or both

- Cards not linked to a separate bank account

• Gift card liabilities fitting the above criteria are considered financial liabilities,

and therefore breakage is recognized according to ASC 405 as follows:

- Recognize breakage in proportion to the pattern of rights expected to be exercised by the cardholder,

only to the extent it is probable that a significant reversal of breakage will not occur

- If no breakage is expected, it is only recognized when the likelihood of exercise is remote

- Disclosure of methodology for gift card breakage would be required

D. PRIVATE COMPANY COUNCIL EFFECTIVENESS

DATES

• During 2014, the FASB finalized four private company alternatives

- ASU 2014-02, Accounting for Goodwill, allows private companies to:

- Amortize goodwill on a straight-line basis over a useful life of 10 years or less if the entity is able to

demonstrate that a shorter useful life is more appropriate

- Test goodwill for impairment only when a triggering event occurs that indicates that the fair value

of an entity or reporting unit is below its carrying amount

- Make an accounting policy election to test goodwill for impairment at either the entity level or the

reporting-unit level

- ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps

- ASU 2014-07, Applying VIE Guidance to Common Control Leasing Arrangements

- ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination

- Entities now have the option to not separate out customer related intangible assets, unless they are

capable of being sold or licensed independently from other assets

- Companies that adopt this MUST adopt the guidance in ASU 2014-02, which requires the

amortization of goodwill over 10 years or less

D. PRIVATE COMPANY COUNCIL EFFECTIVENESS

DATES

• Based on industry feedback, the FASB learned that many private companies had

not been aware of these projects, and thus had missed the effective dates

• ASU 2016-03 deferred the effective dates indefinitely and waived the

preferability requirement, allowing private companies to adopt the alternatives

when the companies experience a change in circumstances or management’s

strategic plan

E. CUSTOMER’S ACCOUNTING FOR FEES PAID IN A

CLOUD COMPUTING ARRANGEMENT

• Aligned cost accounting with revenue accounting for SaaS arrangements

• If arrangement meets the following two criteria, then account for arrangement

as a license (i.e. capitalize cost as a software asset):

- Customer has the right to convert the arrangement to a license with no penalty

- Customer is able to host the software on its own or 3rd party servers

• If both of the criteria are not met, account for arrangement as a service

agreement (i.e. expense as incurred)

• Removed language allowing companies to analogize to lease accounting and

defer implementation fees similar to initial direct costs of a lease, now must

look to other GAAP to account for implementation fees

F. ASU 2014-08, REPORTING DISCONTINUED

OPERATIONS

• Disposal of a component of an entity or a group or components is reported as

“discontinued operations” only if the disposal represents a strategic shift that

has a major effect

• Under previous guidance, a component of an entity that is a reportable segment,

an operating segment, a subsidiary, or an asset group is eligible for discontinued

operations presentation

• Under updated guidance, store closings alone are no longer considered

discontinued operations

• Now must be major shift, such as vacating a geographic region

• Early implementation allowed; effective FY beginning on or after Dec. 15, 2014

G. ASU 2014-15, GOING CONCERN

• Now a U.S. GAAP issue

• Never before addressed in U.S. GAAP, previously only a GAAS concept and

federal securities law concept

• Management is required to assess whether there are circumstances which raise

substantial doubt about an entity’s ability to continue as a going concern

• Going concern must be evaluated for one year after the financial statements are

issued (not just balance sheet date)

• Disclosures should state the conditions present, management’s evaluation of the

significance of those conditions, and management’s plans to alleviate the

conditions

• Early implementation allowed; effective FY ending after Dec.15, 2016, for non-

public companies

H. ASU 2015-03, SIMPLIFYING THE PRESENTATION

OF DEBT ISSUANCE COSTS

• Debt issuance costs are not a “true asset”

• U.S. GAAP is now in agreement with IFRS

• Issuance costs reduce the proceeds of borrowing, thereby increasing the

effective interest rate

• Debt issuance costs are now presented as a direct deduction from the carrying

amount of the debt liability

• The “amortization” of debt issuance costs should be shown as interest expense

and be recognized using the effective interest method

• Early adoption permitted, effective for FS issued for fiscal years beginning after

Dec. 15, 2015

• For lines of credit, ASU 2015-15 clarified that costs can remain an asset that is

amortized over the life of the line of credit

I. ASU 2016-07, EQUITY METHOD AND JOINT

VENTURES

• Eliminates the requirement to retroactively apply equity method

accounting when an investment qualifies for use of the equity method as a

result of an increase in the level of ownership interest or degree of

influence

• New standard simply allows the investor to add the cost of acquiring the

additional interest in the investee to the current basis.

• Apply equity method accounting going forward.

• The amendments in this Update are effective for all entities for fiscal

years, and interim periods within those fiscal years, beginning after Dec.

15, 2016.

J. ASU 2016-09, IMPROVEMENTS TO EMPLOYEE

SHARE-BASED PAYMENT ACCOUNTING

• Part of FASB’s simplification project

• Five provisions intended to stream-line stock compensation accounting:

- Eliminates APIC pool, all taxes recognized in income tax expense as discrete items when they

occur

- Allows accounting policy election to account for forfeitures as they occur rather than estimating

- Allows tax withholding up to maximum statutory limit without triggering liability treatment

- Classifies excess tax benefits as operating cash flows and cash paid when withholding shares for

tax purposes as financing cash flows

• Also two practical expedients for private companies:

- Allows an estimation of expected term for awards with performance and/or service conditions

- Allows use of intrinsic value to measure liability-classified awards rather than fair value

• Effective for public entities for fiscal years, and interim periods within those

fiscal years, beginning after Dec. 15, 2016. Effective for all others for fiscal

years beginning after Dec. 15, 2017.

COMMON ACCOUNTING ISSUES

TOP IDENTIFIED ISSUES – GAAP BASIS

• Lease accounting

• Involuntary conversions (e.g., fire loss)

• Impairment of long-lived assets

• Impairment of goodwill

• Exit costs for operating leases – closed store reserves

• Gift card breakage

• Promotional sales

• Business combinations

• Equity based compensation

LEASE ACCOUNTING

WHAT ISSUES EXIST?

• Tenant improvements

• When to include renewal

periods in lease term

• Sale-leasebacks

HOW TO DEAL?

• Amounts received from landlord should reduce

future rent expense, no netting in fixed assets

• Renewal periods must be included when there

is an economic penalty associated with not

renewing

– Leasehold improvements with life longer than base lease

term

– Location critical to strategy

• Continuing involvement precludes sales

accounting

– Fixed lease payments for major part of remaining life

– Repurchase option (other than ROFR)

– Seller financing of portion of sales price

INVOLUNTARY CONVERSIONS

WHAT ISSUES EXIST?

• Property damage event,

such as a fire, flood, or

hurricane

HOW TO DEAL?

• Loss = 1 Transaction

− All assets destroyed should be written off

− All replacement assets should be capitalized as new assets

− Costs incurred (like clean up, etc.) should be expensed

• Insurance Proceeds Received = 1 Transaction

− When amount is known and carrier agrees to coverage,

record as other income

− Proceeds for clean-up costs, etc., are also other income

• No netting in fixed assets should take place

IMPAIRMENT OF LONG-LIVED ASSETS

WHAT ISSUES EXIST?

• Negative store

performance trends

• Insufficient or negative

cash flow

• Management decision

to discontinue

operations

HOW TO DEAL?

• Project future cash flows using reasonable

assumptions

− Assumptions must be explained and consistent with other

information such as budgets

− Projection should go out over remaining obligated lease term

or estimated remaining life if owned building

• Total undiscounted cash flows > NBV = no

impairment

• Total undiscounted cash flows < NBV =

impairment− Calculate impairment of leasehold improvements - if impaired,

leaseholds typically written off 100%

− Consider what assets can be moved and reused?

- FF&E, computers - not 100% impaired if they can and will be

moved/used elsewhere

IMPAIRMENT OF GOODWILL

WHAT ISSUES EXIST?

• Annual testing required by

GAAP

• Poor store or entity

performance – i.e., negative

operating cash flow

• Management decision to

discontinue operations

HOW TO DEAL?

• Can Step 0 be used? What qualitative

factors exist?

• Measured at reporting unit level

− i.e., stores acquired within one acquisition if assigned

by store or at entity level if goodwill assigned to entire

enterprise at acquisition

• Determine fair value

− Market approach – market multiples

− Cash flow approach – based on 5-year plan

− Assumptions must be explained

− Enterprise fair value > NBV of long-lived assets and

goodwill = no impairment

CLOSED STORE RESERVES

• Closing a store with a remaining lease obligation - How to deal with it?

- Negotiate a complete buy-out with the landlord

- Accrue at year end if not paid

- Still paying rent and either looking for a tenant to sublease or not

- Record an accrual representing net present value of remaining lease obligation less expected FMV of

sublease rentals and disclose

- Lease assumed by a third party – still remain on lease in case of default

- Disclose maximum obligation in notes

- No accrual recorded unless becomes probable that third party will default

- Lease assumed by a third party – legally released from lease

- Obligation ceased, no accrual or disclosure necessary

GIFT CARD BREAKAGE

• Consider escheatment laws in state domiciled and historical breakage experience

- Recognize breakage in proportion to the pattern of rights expected to be exercised by the cardholder

- Historical redemption recognition method

- Preferred method by SEC

• Industry norm is one to two years

• What is the hardest part?

- Understanding what is subject to escheatment and what isn’t – work with your tax preparer

- Getting information from your processor! Important to get aging schedule

• Presentation – Component of sales vs. other income

PROMOTIONAL SALES RELATED TOPICS

• Incentives - Track these transactions separately from regular gift cards

• Groupon, incentive cards, bulk purchase, rewards network transactions

- Record liability for entire amount provided to customer, with an offset to a contra-liability for the net

cash received by the company

- Contra-liability reversed to discounts/customer comps as redeemed at the point of sale/ redemption

- Initial net liability is the amount of the cash received, not the redemption value (e.g., if a Groupon

costs $20, but is worth $30 in food, the liability is $20)

- Discounts are not recognized until redeemed

BUSINESS COMBINATIONS

WHAT ISSUES EXIST?

• Assets and liabilities

recorded at fair value

• Bargain purchase (negative

goodwill) – Gain in P&L

• Expense transaction costs

vs. capitalize

• Proper application of

purchase accounting

HOW TO DEAL?

• Identify assets acquired and record at fair

value

− PP&E

− Intangibles – non-compete agreements, reacquired

franchise rights, trademarks

• Assess leases assumed – favorable or

unfavorable positions?

• Decide whether to apply private company

expedients

EQUITY BASED COMPENSATION

WHAT ISSUES EXIST?

• Valuation

• Fair value/intrinsic value on the

date of issuance

• Term over which expense should

be recognized and amount

• Disclosures

• Possibility that all or a part of

instruments could be classified as

liabilities

• Potential tax effect on recipient

HOW TO DEAL?

• Understand value at the time of

issuance

• It is possible that an valuation will need

to be performed by a professional with

the applicable credentials

• Discuss with your CPA prior to providing

the rewards to understand the affects of

issuing the stock based compensation on

financial statements

• Discuss with your CPA to understand the

tax impact on the recipient

AUDIT EFFICIENCIES AND EXPECTATIONS

PLAN AHEAD

• Audit vs. review – what do you need?

• Income tax basis vs. GAAP

• Keep your auditor informed of new issues

• Make the most of your planning meeting

- Set expectations of the audit team and company personnel

- Understand the audit request list

- Agree on realistic times and stick to them

• First-year audits

- Know your issues and ask for assistance where necessary

BE EFFICIENT DURING FIELDWORK

• Be prepared and ready for your time slot

- Understand new GAAP requirements

- Reconciliations vs. GL Detail

- Reduce delays – delays cost $$

• Permanent file and subsequent event updates

• Bank covenants – be proactive – don’t wait!

• Communicate, communicate, communicate

- Respond to audit requests timely

TRUMP PLANS FOR TAX REFORM

AND POSITIONS ON ITEMS THAT

IMPACT THE RESTAURANT

INDUSTRY

TRUMP TAX PLAN

• Reduce corporate tax rate from 35% to 15%

- Unspecified deductions would be disallowed (except for Research & Development) – no

details on this

• Flow-through business rate of 15% plus a second layer of tax on distributions (like a C Corp)

• Increase Section 179 depreciation from $500,000 to $1,000,000

• Seven individual tax brackets to three – 12%, 25% and 33%

• Repeal of 3.8% Net Investment Income Tax (as a result of ACA repeal)

• Repeal the Alternative Minimum Tax

• Retain the existing Capital Gains Rates (max 20% rate)

• Individual standard deduction - $15,000 for single and $30,000 for MFJ

• Individual itemized deductions – max $100,000 single and $200,000 MFJ

• Repatriation holiday (one-time) – 10% tax rate

Sources – Trump website and CCH Intelliconnect Tax Research Site

OTHER CONSIDERATIONS

• Repeal or major overhaul of the Affordable Care Act

• Health care – allow purchase of insurance across state lines

• DOL Exempt/Nonexempt Rules – no official position yet but mentioned a desire

for a “delay or carve out” for small businesses

• Minimum Wage - $10 per hour, allowing states to pursue higher rates

• Parental Leave – includes 6 weeks of paid leave and an earned income tax credit

for dependent care

• Immigration – tough on campaign trail – wait and see now…

Source – Nations Restaurant News

TAX TOPICS TO CONSIDER FOR

YEAR-END

BONUS DEPRECIATION

WHAT IS IT?

• Ability to deduct a percentage of the cost of certain new assets in the year

acquired

• Balance of cost is depreciated over tax life

OLD RULES

• Deduct 50%

NEW RULES

• Deduct 50% in 2015, 2016 and 2017

• Deduct 40% in 2018

• Deduct 30% in 2019

SECTION 179 DEPRECIATION

WHAT IS IT?

• Ability to deduct 100% of the cost of a qualifying new or used asset in the year

acquired

OLD RULES

• Deduct up to $500,000 (subject to phase-out) – set to expire back to $25,000

NEW RULES

• Permanently extended at $500,000

BENEFICIAL TAX LIVES AND TREATMENTS

QUALIFIED RESTAURANT PROPERTY

• Permanent!

• 15 year life (no bonus depreciation) on certain building and leasehold

improvement assets

QUALIFIED LEASEHOLD IMPROVEMENT PROPERTY

• Permanent!

• 15 year life (with bonus depreciation) on certain interior leasehold

improvements

BENEFICIAL TAX LIVES AND TREATMENTS

QUALIFIED IMPROVEMENT PROPERTY (NEW IN 2016)

• Permanent!

• 15 or 39 year life (with bonus) on certain interior leasehold improvements

• A win for getting bonus on improvements to owner occupied buildings!

OTHER TAX ITEMS IMPACTING RESTAURANTS

WORK OPPORTUNITY TAX CREDIT

• Extended until tax year 2019

• Now includes a class of individuals who have been collecting unemployment for

at least 27 weeks

EMPOWERMENT ZONE CREDITS

• Extended until tax year 2016

• Credit you can calculate yourself - https://egis.hud.gov/ezrclocator/

OTHER TAX ITEMS IMPACTING RESTAURANTS

INFORMATION RETURN REPORTING CHANGES

• Forms W-2 and 1099 copies for the IRS now due Jan 31 (starting with the 2016

forms filed in Jan 2017)

• Allows IRS time to review documents for tax return matching and reduction of fraudulent returns

• Safe Harbor for penalties relating to filing correct information returns and

furnishing correct employee statements if error is $100 or less ($25 or less if

related to tax withholding) – for W-2s, 1099s and similar forms

• Issuer of form is not required to file a corrected return

• Recipients of such returns can elect to have a corrected return issued to them and filed with the IRS

• Effective for 2016 forms filed in 2017

• Key is to cut down on paperwork and amended returns for de minimis changes

DE MINIMIS SAFE HARBOR CAPITALIZATION POLICIES

OLD RULES

• Audited financial statements = “up to $5,000 per item” expensing safe harbor

• All other taxpayers = “up to $500 per item” expensing safe harbor

NEW RULES EFFECTIVE 1/1/2016

• Audited financial statements = “up to $5,000 per item” expensing safe harbor

• All other taxpayers = “up to $2,500 per item” expensing safe harbor

MAKE SURE …

• Policies are updated to maximize your benefits!

• Tax and book expensing policies conform to each other

• Your policy does not result in debt covenant issues

• Your accounting department is applying your policy on a per item basis

RESTAURANT REMODEL SAFE HARBOR

(REV. PROC. 2015-56)

• Tax-only policy for taxpayers with audited financial statements

• Benefits

- Provides a 75% immediate write-off of qualifying remodel costs

- Eliminates the need for more costly analysis of construction costs

- Can capture remodels from prior years

• Downsides

- Once adopted, the method must be used on all future remodels

- No partial dispositions on remaining building assets for that location (i.e., remaining 25% not expensed

as remodel and any existing capitalized building assets)

• Must have audited financial statements

• General Asset Accounts are required going forward

RESTAURANT REMODEL SAFE HARBOR

(REV. PROC. 2015-56)

QUALIFIED REMODEL PROJECT

• Undertaking to alter the physical appearance and/or layout to:

- Maintain a contemporary and attractive appearance

- Standardize layout of all stores

- More efficient functions

- Excludes painting & cleaning projects – most likely 100% expense under different rules

ELIGIBLE COSTS

• Adding, replacing, repairing maintaining or relocating permanent floor, ceiling or

wall coverings or kitchen fixtures

• Relocating or changing the square footage of departments, eating areas,

checkout areas, kitchen areas, etc., within the existing footprint

RESTAURANT REMODEL SAFE HARBOR

(REV. PROC. 2015-56)

EXCLUDED COSTS

• Initial build-out costs

• Section 1245 property (FF&E)

• Land and land improvements

• Intangibles

• Rebranding within two years of acquisition of initial lease or building

• Fixing a material condition or defect prior to acquisition

• Material additions

• Changing total square footage by 20% or more related to new of different use

• Costs incurred in temporary closing for more than 21 days

DPAD: HIDDEN TAX DEDUCTION FOR THE

RESTAURANT INDUSTRY

WHAT IS IT?

• Deduction of 9% of the total net income from eligible “manufacturing” activities

WHAT QUALIFIES?

• Food items made in a commissary or separate facility that is later incorporated

into recipes to make completed meals in a restaurant

• Pizza dough, bread/rolls, sauces

ENHANCED CHARITABLE DEDUCTIONS OF FOOD

INVENTORY

WHAT IS IT?

• Donation of “apparently wholesome food”

• To a tax-exempt charitable organization to feed the ill, the needy, or infants

• Enhanced Deduction = (Basis + ½ profit, if sold at FMV), but not to exceed (2 x Basis)

OLD RULES

• C corporations permanently allowed an enhanced deduction for contribution of

food inventory

• C corporation limitation = 10% of taxable income

• “S” corporations and “LLCs” could claim the deduction through 12/31/2014

• Limitation for total charitable deductions related to food inventory for pass-

through owners = 10% of aggregate net income from all income sources that

make food inventory donations

ENHANCED CHARITABLE DEDUCTIONS OF FOOD

INVENTORY

NEW RULE

• Effective 1/1/2015, the enhanced deduction is now permanent for all types of

entities

• Effective 1/1/2016, the limitation for total charitable deductions related to food

inventory = 15% for all types of entities, with a 5 year carry-over of the excess

• Effective 1/1/2016, there is a presumption that FMV used in the computation =

price at which same (or substantially similar) food items are sold by the taxpayer

at the time of the contribution – regardless of whether the food would actually

have been sold. This will eliminate disputes with the IRS, who previously argued

that if food was not sold due to internal standards, lack of market or b/c it was

produced solely for the purpose of donating, then it was not “apparently

wholesome”, and FMV would not be appropriate to use in the computation of the

deduction.

SAVE THE DATE!

WEDNESDAY, JANUARY 11, 2017

FEATURING DENNIS HOYT FROM HOYT TREASURY

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range

of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of

experienced and committed professionals. The firm serves clients through 63 offices and more than 450 independent alliance firm locations

nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,408

offices in 154 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and

forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO

Member Firms. For more information please visit: www.bdo.com.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual

needs.

© 2016 BDO USA, LLP. All rights reserved.