Adam Garfield, CPA

So here’s the deal with one of my clients who is impacted by the minimum wage increase.  First, the big story on the news was that not very many businesses in Utah would be impacted by the change.  The argument was that most businesses were already paying most of their employees above the $7.25/hour rate.  Valid point.  Restaurant owners might beg to differ, however.

My client brings home an income in the low six-figure range from operating these restaurant locations.  His earnings are well above the national average.  But the lion’s share of his employees are either paid close to or at the minimum wage level.  That happens to be the going rate in this market and economy.  He’s competitive.  So giving his newer employees who are making minimum wage an extra $0.70 per hour makes all of his more experienced employees clamor for a similar kick up in pay.  “If Ernie’s value to this location is now 11% higher, than my worth certainly should go up,” is the likely thinking of the higher-paid employees.  They’ve got a valid claim.  As a result, they push the owner for more money as well.  And to compete, he’s inclined to meet their request.

The flat-out reality for him is that, based on his 2008 profit and loss statement, his labor costs (not including increasing the pay of each store’s general manager) would increase by $55,000.  Fifty-five K.  That just blew his take-home below six figures.  And since most of us live our lives by spending more when we get more, the whistling noise you just heard is his disposable spending power jettisoning downward.

Will he still make a good living from his restaurants?  Yes, relative to his new employees.  But determining what to cut out in his spending life to accommodate that $55,000 take-home decrease is like swallowing a doorknob.  He has options, and we’ll go over them next time.  However, none of them are palatable or realistic.  So here’s one vote for the wage increase causing problems despite the ones it is trying to fix.

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Have you heard? This is Michael-Jackson-passing big. Um okay, maybe not. At least, not if you watched CNN a few weeks back (all MJ death, all the time). But still . . . the federal minimum wage goes up from $6.55 to $7.25/hour on 24 July 2009. Which happens to be Pioneer Day in Utah. Coincidence, you ask? Mark Sanford ‘hiking in the Appalachians’ would certainly beg to differ. And what a better way to celebrate the rugged, perseverant, death-cannot-conquer spirit of the first religious settlers in the Salt Lake Valley than by dropping an extra seventy cents per hour (less FICA and medicare, of course) in the checks of nearly two million Americans.

This is the last of three increases from a law passed back in 2007 during the Dubbya administration. The official title of the law that included this three-tiered increase was called, oddly enough, “The US Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007″. Well of course you’d expect to see a wage increase provision buried in that sexy moniker. Me-yow!!!

I see it coming already. “Who cares?”, you’re thinking to yourself as you take that last bite of Twinkie. Some zit-faced stoner who wants to know if you’re going to super-size your order gets some extra dime-bag cash to help him until his voice quits cracking. “Good for him”, you proclaim to yourself.

Well, maybe not so much. Not good for him (if he really knew what was good for him, especially long-term). Not good for his boss/restaurant owner. Not good for you Ms. Consumer. Next blog I’m going to tell you why, painting a real-life scenario involving a very nice client of mine whose business world is about to get rocked. Until then, beat it. Either that or don’t stop ‘til you get enough (Hee! Hee!).

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So in addition to Mr. Obama’s §179 increase through the American Recovery and Reinvestment Act of 2009, he also brought back what is called bonus depreciation. The great thing about it for many new restaurant owners is that it allows you to take all those build-out costs and pick up potentially half of them or more the year you open your restaurant.

Let’s say that you decide to go for it and plunk down $25K for your McArnold’s (not to be confused with, ahem, that one place whose name rhymes with McSchonald’s) burger joint. You find and lease a great spot in a strip mall that is (important tax fact requirement to follow) at least three years old. Under normal tax depreciation circumstances, all of the build-out costs are typically spread out over either fifteen or thirty-nine years. Yikes. But with the Senate’s plan, you can take half of those costs and expense them on the first-year tax return for the business. That could emerge as a very large dollar amount. If you spend $175K for these costs and open your restaurant mid-year, you would be able to pick up over $90,000 in deprecation expense. Terrific tax savings for either 2009 or 2010.

Keep in mind that the initial year tax savings you enjoy will be offset by less deprecation expense, and hence, less tax savings in future years. But from my perspective, this is much like winning the lottery. Take the $115 million now instead of $198 million over twenty years. After all, who know what the future brings? That is, unless you ask Nostradamus.

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So how’s that walk-in freezer treating you? Or rather, your food. Are the frozen peas mushy? Is it confusing 18° Celsius with 18° Fahrenheit? More cheap-o-personal-fan-like than freezer-like? So the sucky part is you’ve got to pony up for a new freezer. The good part is that the American Recovery and Reinvestment Act has a provision that’s right up your tax-saving ally.

So here’s the deal: Pretty much any piece of equipment you buy for your shaved ice kiosk (it is, after all, summer) can be fully expensed for income tax purposes. Even if you cough up $250,000 to buy the 8 gazillion BTU stove for the back of the house, you’re covered. You can offset this cost against the net income for your restaurant to the extent your business has earnings.

If you happen to be opening a restaurant in 2009 and are worried that you’ll report a net loss even without the equipment expense, not to worry. You can still make the election to expense your equipment, and carry the unused amount forward to offset all that gnarly net income you’ll be showing in 2010 and beyond, just as soon as your Cheez Whiz ‘n Spam casserole concept catches on nationwide.

As always, please consult with a competent tax advisor to make sure it works for you. Hey, wait a minute. I’m one of those guys. Well then, consult with me if you’d like. Until then, however, pass the ketchup (catsup??). I got me a hankerin’ for some o’ that thar Cheez-am-erole. Good eatins’. And more tax savings ideas next blog.

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What’s a point worth? Ask the ‘98 Utah Jazz after MJ hit his hold-the-pose jumper over Bryon go-ahead-and-push-off-me Russell. How about half a point? Well, the sports analogies don’t work so well. Except maybe for soccer, which is, arguably, the stupidest spectator sport ever. And could probably come up with some insidious way to have team A beat team B by half a point.

How about a point on your profit/loss statement? If your restaurant is pulling in what might be argued a paltry $30K/month, that’s a great deal of money. In fact, it approaches paying my fees if you want your financial oversight needs outsourced.

I helped a restaurant client switch over from one credit card processor to another. Saved him about a point in costs. During his best months, that pushes $1,000. That’s a great deal of money. And the thing about it was that he wasn’t even paying an exorbitant rate. We were just able to find a company who processed his credit cards for a notably more reasonable rate than the one he was paying. And he’s now been with the new company long enough for us to confirm that there wasn’t a bait-and-switch teaser rate that got upped after a certain period. It’s the real deal.

I’m not writing this to stump for a particular merchant card processor. But it is possible to cut costs in a wide array of areas of an income statement and both favorably and materially increase the bottom line.

Look around. Are your cleaning supplies too costly? How about the guys who clean out your grease trap? Is your main food vendor still stinging you with ‘energy surcharges’ (which is French for gas-prices-are-through-the roof) even though fuel costs are much lower than they were last summer? Are those banners too pricey? Take a little time to examine, make calls, do your homework, and price shop. While it’s not always the end-all, beat-all determinant for an expense, it certainly should be closely monitored.

Now, let me get back to the game. Last I checked USA was up on España two-nil. Uh, wait a minute.

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Lots of things can kill a location for a restaurant venture. From something as seemingly innocuous as ingress/egress (which are fancy/schmancy words for the ease and ability to enter and exit, by vehicle, the area where the place is located), to the proximity to other retail establishments, the ways by which a restaurant’s location can hurt it are varied.

I once had a client who came to me after he chose to build up, from footings to rooftop, a new building to house his Mexican food fare. It was a costly error in itself, but from my perspective it was greatly exacerbated by the fact that it was tucked away and nearly invisible from the main street. As a new concept, it needed to be seen. And it wasn’t. This helped spell its doom. While the restaurant was built near a theater chain, the theaters were of the dollar movie variety. And because its menu prices, which despite being fairly reasonable, weren’t in line with the customer base for the center, it failed. Kids and families went to the movies there and paid a buck and change. They weren’t willing to spend the kind of money this full-service place was looking to draw. And the primary draw was the movie theater, rather than the restaurant itself.

I saw another client choose an end cap location in a well-established strip mall. The problem was that nothing had ever succeeded at this particular end of the mall. I watched 3-4 restaurants and other retail outlets over a number of years try their luck at this unit number, and all were finite and fairly short-lived. It was a very tough left-hand turn to make into this end of the strip mall. To make matters worse, cars were not supposed to use this same end to exit onto the main road. As a result, cars had to go all the way to the other end to get out. It was a long, narrow strip, making it inconvenient to leave. I think this hurt his chances as well.

There are other things that hurt a restaurant’s chances due to location, such as perception of the center as an appealing place to be, age and upkeep of the center itself, and the product/service makeup of other tenants in the center. The waters are teeming with hazardous ways a restaurant can fail. Treading carefully in the location decision is a crucial element to its success - or failure.

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I watch “Breaking Bad”. It is stunningly brilliant. Emmys to all involved on this show. To nutshell the plot: Walter White, a middle-aged high school chemistry teacher is diagnosed with lung cancer. To fund its treatment cost and provide for his family since he thinks his illness is terminal, he decides to cook and sell, with the help of a former student-turned-junkie, a chemically pure form of meth. It’s a heartbreaking, surprising, truthful, wincing, dark, at times funny, and unflinching moral play on choice and its ramifications. Season two’s finale catapults this concept, dramatically and unexpectedly, to the law of unintended consequences.

“Well that’s nice,” you’re saying to yourself, “I’m glad you like shows about people who make disgusting decisions, Mr. Restaurant Accounting Guy, but how does this help me increase my bottom line?” While I’m pretty sure that a TV program with fictional characters won’t do that, I’ve thought about it from a number of angles, a stand out one being location (x3). You know the adage.

I’ve had a couple of clients who, in my blog-advice-is-free opinion, made the fatal mistake of choosing the wrong locale for their new restaurant concepts. Arguably, there were other factors that contributed to their downfalls (both of which were spectacular - and sad). But where the real estate footprint was went far in causing their doors to eventually close.

I’ll flesh out the details in my next blog. Meanwhile, I’ve got an awesome recommendation for your business based on this show about a cuddly purple dinosaur named Barney who sings about love.

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The manager needs to buy plumbs. Or olives. Or wheatgrass. Or band-aids. She doesn’t have any cash. What to do? Why, petty cash to the rescue, of course (what, you were expecting Sham-Wow or something?).

While the amount you keep in the emergency till will vary depending on your sales volume and access to immediate vendor response, every restaurant needs a kitty for these scenarios. Put a couple hundred bucks in it, let’s say. Limit the access to the general manager and a few trusted assistants. Cap the dollar amount spent from it. And most importantly from the accounting angle, reconcile it regularly.

This might require your accounting person to make routine visits to the storefront to tie things out. I have clients who reimburse it by submitting original receipts on a reimbursement form. Helps keep the operations folks honest. I’ve yet to see a sales slip for a condom purchase at Walgreen’s stapled together with the Krogers proofs of purchase for canned ham.

Do your due diligence with your client, though, in reconciling. Count the petty cash till. If it doesn’t balance, suggest to your client that the manager’s bonus be adjusted downward, dollar-for-dollar, perhaps. Either that or make him buy a Snuggie.

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So, long time no write/muse/blog/ramble.  I can use tax season as an excuse, and it was, in fact, very busy, but having said that, it’s been mostly over for a month plus now.  So that excuse is a bit lame-A.

I have missed this.  Writing is usually pretty cathartic for me, even something as snore-inducing (I’m sure some people see it this way) as restaurant accounting.  Nice outlet, change of pace from my regular work, all that stuff.  But I apparently haven’t missed it enough to do something about it, which is put fingers to keyboard and start banging away.

Before I dive back into the blog focus at hand, I’ll share a few random thoughts with you that I’ve been mulling over.  First is my favorite tax season story. I have this real estate agent client.  Great guy, funny, very generous (he let me and my buddy stay at an investment home of his for a baseball tournament that both of our kids played in last year in St George, Utah).  Amongst other things, he’s really into muscle cars.  He has a couple of Corvettes, a Mustang, and I’m sure if his funds were unlimited the collection would be greatly expanded.  I suggested that he get himself a Datsun B-210 “Honey Bee”.  He said no.  Am I the only one who digs those things?

Anyway, he’s constantly looking for deductions for his business.  He wanted to deduct the cost for his muscle cars.  I explained to him that sure, we could do that - to the extent of their business use. He responded by informing me that of course they were legitimate business vehicles, because every time he cruised around in them he’d get stares from everyone and was convinced that this somehow translated into business income.  I had to let him know that unless a conversation similar to, “Hey, bitchin’ ‘vette man, will you sell my house now?” had taken place, he didn’t really have an argument that the cars were used for his real estate business.  And for you hard-core tax guys or girls who may be reading this and thinking, “Yeah, but if he puts miles on the cars while he is showing houses, he can deduct the cost”, rest assured, he doesn’t.

On a related note, I have a buddy whose wife makes those vinyl letters and designs that are popular right now.  People usually put them in their houses or on their cars. I have a good friend - actually one of the finest people I know - whose home interior is nearly covered with these things.  Inspiring phrases and words everywhere.  It’s like “Chicken Soup for the Soul” threw up on every wall.

Beyond the home use, while I don’t know if this particular application has made its way out of the state of Utah, you see here a lot of mini vans that have the back windows plastered with vinyl cutouts of stick-figure people representing members of the family that owns the van.  You know, typically a larger male and female figure for the parents, then smaller ones, identifiable by gender, representing each of the children, often in correspondingly smaller size for each child’s age or height.  In Utah, that often means a minimum of five to twelve kiddies.  Then they’ll throw in a kitty or doggie cutout for their pet Snowball or Rover, or even a fish shape for Nemo.  I’m sure there’s a contingent of folks that pleasantly sigh at the sight of these things. Makes me want to ralph.

Anyway, back to my point.  My buddy told me that as long as you have at least three sides of your vehicle advertising your business with these vinyl items, then you can ‘write off’ the vehicle’s costs for your business.  Hmmm, interesting take.

So, I’m back writing.  Will it last?  I hope so.  I plan on it.  Thanks for staying with me.

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I recently began doing some work for a new restaurant client.  Despite the newness of the work, I was first introduced to this person last summer, about four months after the business opened for operations.  They were in need of some outsourced financial oversight, and I pitched my services.  While obviously interested, this client put off pulling the trigger on the decision until this year.

My first caution to them when I found out they were paying their employees as contract labor was to immediately halt this and treat them like the employees they were, whether they used my payroll services, did it themselves, or hired it out elsewhere.  While hell may hath no fury like a woman scorned (or in my house, a woman whose dirty dishes remain unloaded by her lazy-butt husband), a business hath no fury quite like the IRS’s view of misclassified employees.

Now, this may seem like DUH territory here.  I mean, if you’ve got employees, pay ‘em like they’re employees.  Withhold payroll taxes, remit them to the IRS and other tax authorities when you’re supposed to, and file all federal, state, and local payroll tax returns when required.  Having said that, I’ve seen this movie before.  And it can be much uglier than that dude without a nose from “Harry Potter v. Predator” (or whatever that show is called).

The IRS doesn’t dink around when it comes to stuff like this.  If you have people who show up to your place of business to cook chicken, bus tables, pour drinks, seat patrons, blend smoothies, or even occasionally break dishes, and they are under your control and direction, then by gosh they are EMPLOYEES, not independent contractors.  This is true no matter what your uncle or best friend or food provider or even your employee himself says.

There are all kinds of ways that tax authorities can a) find out that you’re doing this b) reclassify these people as employees instead of contract labor and c) pretty much make you cough up a boatload of cash to not only cover the taxes you never withheld, but ding you with penalty and interest as well.  Filing the income tax return with a big g00$e egg on the salaries/wages line but an amount for contact labor is one.  Issuing 1099s instead of W-2s is another.  And third, but perhaps most likely, is that an employee will gripe after receiving a 1099 instead of a W-2.  And that gripe could very well go in the direction of the IRS.

This is not a whirlwind of trouble that you want any part of.  Do right by your business, your employees, your ethical side, and your ability to put your head on the pillow at night.  For tax purposes, treat your employees as just that - employees.

By the way, I think Predator would win.  Even though he’s one ugly, er, Hollywood monster.

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