Hospitality industry tax deductions worth exploring
Almost every industry has its own, special, tax deductions. The hospitality industry is no exception. However, proper tax management can be very difficult, and it is usually advised that you choose one of the best tax resolution firms to help you out. Even if you do hire professionals to help you deal with your taxes, knowing about your options will allow you to make better decisions going forward. Information can be both money and power, after all. And that is why this article is going to detail some of the hospitality industry tax deductions that you might want to explore. By knowing about these tax deductions, you will obtain an excellent foundation to build upon.
Six hospitality industry tax deductions that are worth exploring
Most of the time, owners of hospitality-based businesses have their hands full with dealing with day-to-day operations. It can be hard to find time to learn about various tax reductions for businesses that might help you out. That is why we compiled all the best deductions in an easy-to-read list. Here they are:
- Bonus depreciation
- Work opportunity tax credit
- Tip credit
- Section 179 deduction
- Research and development tax credit
Do note that these are not the all tax deductions that your business might be eligible for. Tax deductions depend on a variety of factors, and it all can get quite complicated. That being said, even if you choose to focus on these deductions alone, you stand to make quite a difference. These six tax deductions will allow for considerable savings, provided you plan ahead for them.
In fact, planning your tax return as early as you can is extremely important. Even so, chances are that you might end up filing your taxes at the last minute, it happens. Luckily, you can utilize our last-minute tax filing tips and stay ahead. But you always want to start dealing with your taxes as early as you can. For now, let’s see what tax deductions are available for you, starting with:
This is one of the most common hospitality industry tax deductions. However, it is also one with a strict time limit. Basically, you can fully expense some of your expenditures as opposed to depreciating them over a period of several years. Any such expenditures that have been placed in service after Sep. 27, 2017. are eligible. Bonus depreciation allows you to boost your tax refund amount by spending your capital immediately, as opposed to over several years. Also, both old and new assets are eligible.
However, as mentioned previously, there is a time limit on bonus depreciation. As it currently stands, the only assets that are eligible for this tax deduction are those that were acquired before January 1, 2023. This means that you might want to start planning any qualifying expenses pretty much immediately. There is a chance that this window of opportunity might be extended, but it is not something that you might want to plan around. The best thing to do is to act early and get the maximum benefit while you still can.
Work opportunity tax credit
If your business hires employees from certain target groups, individuals that have traditionally faced employment barriers, you will be eligible for the work opportunity tax credit. Hospitality business owners can claim this particular credit on both the first and second-year wages for any qualifying employees. Additionally, any wages that you’ve incurred for these employees also qualify.
However, there are a few “hoops” to jump through, so to speak. First, you need to get a certification for each employee that stands to benefit from the work opportunity tax credit. This certification needs to be issued by the state workforce agency (SWA). The agency that can issue valid certifications will be the one that is located within the state where your business is located. The certification itself serves to provide proof that the employee in question is, indeed, a member of the targeted group. The only way to benefit from work opportunity hospitality industry tax deductions is to receive the certificate.
There are two ways of acquiring the certification. First, you can complete the IRS Form 8850 – Pre-Screening Notice and Certification Request for the Work Opportunity Credit. You need to complete this form on the same day when you offer the job to the employee, or earlier. To claim the credit, you will need the IRS to approve the certification.
Alternatively, you may contact your SWA and receive the certification before the employee starts working at your business. Getting your employee approved for the work opportunity tax credit is a great way to cut your tax bills, but it does require additional paperwork. If you don’t happen to have the time to sort everything on your own, remember that you can always hire tax professionals to do it for you.
Eligible target groups
While the target groups change from time to time, the following list includes the current target groups that are eligible for work opportunity tax credit:
- Long-Term Family Assistance recipients
- Summer Youth Employees
- Qualified Veterans
- Supplemental Security Income Recipients
- Designated Community Residents
- Qualified Long-Term Unemployment Recipients
- Qualified IV-A Recipients
- Vocational Rehabilitation Referrals
- Supplemental Nutrition Assistance Program Recipients
If any of your employees fall under any of the abovementioned groups, you will be able to claim the work opportunity tax credit under their name.
The hospitality industry is one of the industries that may qualify for the 199A tax deduction. This deduction, under certain circumstances, provides up to a 20% deduction on all qualified business income. 199A is available to sole proprietorships, eligible partnerships, as well as S corporations. However, the effectiveness of this tax deduction depends on your taxable income.
If the taxable income of your business exceeds $315,000 for joint filers or $157,500 for everyone else, the 199A tax deduction comes with a set of limitations. These limitations depend on whether your business is classified as a standard business or a service trade, your taxable income, unadjusted basis immediately after acquisition of your property, and the amount of W-2 wages of your business.
It may all sound very complicated but remember that these limitations only apply if your taxable income exceeds the set threshold. If you are running a small business, chances are that you will simply be eligible for the 20% deduction without any additional thought. If your taxable income exceeds the threshold, your best bet is to consult tax experts, as every situation is different. Just make sure to avoid IRS tax relief scams, as they are quite popular these days. It is always best to turn to well-known and reliable tax firms.
One of the most important hospitality industry tax deductions – Tip credit
Tips are a big part of the hospitality industry. That is why one of the most important tax deductions you can “lean on” is the tip credit. The tip credit is a part of the general business credit and its amount is equal to the amount you’ve paid for employer social security and Medicare taxes for the tips received by the employee.
To be eligible for this credit, there are two prerequisites. First, your employee needs to have received a tip from a customer for serving food and/or beverages for consumption, provided that the tip for doing so is customary. Second, your business needs to have paid or incurred Medicare and social security taxes on those same tips. If both prerequisites are fulfilled, you can then apply for a tip credit.
Section 179 deduction
Section 179 presents hospitality business owners with an encouragement to increase their budget for capital expenditures. Under this section, all hospitality businesses are able to deduct up to $1 million off the cost of any qualifying property that has been placed in service in the corresponding tax year. Furthermore, certain business property purchases (up to $2.5 million) can also be eligible for this particular tax deduction. As far as hospitality industry tax deductions go, Section 179 offers the most substantial returns.
Eligible property includes any equipment that is purchased or is in use in the hospitality business, as well as property improvements. Additionally, it also includes expenses such as fire alarms, security systems, roofs, HVAC systems, and similar. Of course, all of these need to be installed within a non-residential property. However, Section 179 does not apply to new construction. It only applies if you are improving your current place of business.
Research and development tax credit
The research and development (R&D) tax credit presents an incentive to hospitality businesses that want to invest in their own research and development. This credit amounts to 13% of any eligible expenses. To qualify for this credit, your R&D needs to satisfy four criteria.
First, you will need to be researching new or improved products, software, or business processes. Second, the research needs to be technological in nature. Lastly, it also needs to eliminate uncertainty and have a process of experimentation. The eligible costs include wages paid to your R&D employees, research expenses, testing expenses, employee wages, supply costs, as well as any costs that might be associated with patents. This is one of the tax deductions that you might want to keep an eye out for, as it significantly lowers the R&D costs.
These were some of the best hospitality industry tax deductions available. If you want to know more about other popular tax deductions, all you need to do is browse and explore the Consumer Opinion Guide. Our knowledge database is there to help you maximize your tax return and enhance your business!