Following are a few important issues our accounting professionals wanted to briefly share with you. As always, should you desire more in-depth information please feel free to contact us.
WHO KEEPS THE TIP?
Taking your staff out for Chinese?
With six you get Egg Roll. With six and larger parties you also may get a guest check with a gratuity tacked on by the restaurant — presumably a convenience for the mathematically challenged diner.
But is this automatic gratuity a tip or a service charge? Starting next year, it’s going to be called a service charge says the IRS who just pulled up a chair to your table.A recent IRS ruling that becomes effective on January 1, 2014 represents a major change in operations and potentially an increased financial burden to all restaurants.
According to the IRS, a tip is a payment that must:
* Be made free of compulsion.
* Allow the customer to have unrestricted right to determine the amount.
* Allow the customer the right to say who gets the payment.
* Be non-negotiable or dictated by the employer.
All else (including filled-in tip amounts called automatic gratuities) will be deemed a service charge, and according to Revenue Ruling 2012-18 any portion of a service charge that is distributed to an employee (servers) is considered wages subject to withholding and employer payroll taxes (FICA and Medicare).
But that’s just the first course.
For the second course, the newly defined service charge will be considered revenue to the restaurant of which they must pay income taxes. Although this may be offset by a deduction in wage expense, it certainly will push the overall gross receipts higher. As a result, the IRS should get a high-five from many state and local governments that calculate their LLC fee or city business license fee on gross receipts.
For the third course, as the service charge is not considered a tip, restaurants will no longer be able to apply the amount to the “tip credit” for the portion of employer FICA taxes paid with respect to employee cash tips. This, of course, comes with a side dish — servers may need to wait until payday to get their fully taxed tips.And for dessert, depending on jurisdiction, that newly defined tip could be added to the total bill and be subject to state and local Sales Tax. So, who keeps the tip? Apparently, federal, state and local governments – for under this new ruling an automatic gratuity is now subject to revenue, wages and sales taxes.
FLEXIBLE SPENDING ACCOUNT
USE-IT-OR-LOSE-IT RULE MODIFIED
The IRS has offered guidance (Notice 2013-71) modifying its “use it or lose it” rule to allow employers to amend their plans and allow employees to carry over up to $500 of unused money in a health flexible spending account (FSA) from one plan year to the next, according to Weinberg Director of Tax, Jeffrey Engler.
Under current proposed regulations for cafeteria plans (under Section 125), a health FSA participant generally forfeits any money left in the FSA at the end of the plan year. Certain exceptions include the run-out period and the grace period. The run-out-period rule allows plan sponsors to specify a run-out period after the end of a plan year when participants can be reimbursed for medical costs incurred during the plan year that are submitted during the run-out period. Under the grace-period rule, the plan may allow an employee to use amounts remaining in the plan from the previous year to pay medical expenses incurred during the period up to two months and 15 days immediately following the end of the plan year. Currently, any amounts remaining in the plan after the optional run-out or grace period are forfeited.
“Plan sponsors now have the option to amend their plans to allow up to $500 of unused funds in the health FSA to carry over to the next plan year,” said Mr. Engler. “In general, the cafeteria plan amendment must be adopted on or before the last day of the plan year for which amounts may be carried over. The amendment may be retroactive to the first day of that plan year, provided that the plan operates in accordance with Notice 2013-71 and informs the participants of the carryover provision. For plan years that began in 2013, the plan may be amended any time on or before the last day of the plan year that begins in 2014,” he continued.
A health FSA that is amended to include the carryover option is permitted to have a run-out period but not a grace period. If a plan has included a grace period and is being amended to add a carryover provision, the plan must also be amended to eliminate the grace-period provision by no later than the end of the plan year from which amounts may be carried over. The elimination of a grace-period provision may be subject to nontax legal constraints.
The Affordable Care Act amended Section 125 to limit the amount an employee may elect to contribute to a health FSA during a plan year. In 2013 and 2014, the limit is $2,500. The new carryover option does not affect this plan-year limitation. An employee may carry over to the subsequent year up to $500 and still elect to contribute up to $2,500 in that subsequent year.
OIL & GAS INDUSTRY VOICE OPPOSITION TO PROPOSED CHANGES TO LEASE ACCOUNTING
As reported in an earlier issue of Simply Stated
, The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to improve the financial reporting of leasing activities under International Financial Reporting Standards (IFRSs) and the U.S. Generally Accepted Accounting Principles (U.S. GAAP).
Under existing accounting standards, a large number of leases are not reported on a lessee’s balance sheet. In the most recent exposure draft circulated, the two Boards proposed sweeping changes that would require a lessee to recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. Leases would also be classified as Type A or B determining the method and term of reporting revenue and expense.
Though intentions may be laudable, sweeping regulatory accounting changes often have disproportionate adverse implications on specific industries according to Corey Fischer, Weinberg Firm Managing Partner.
“Our clients in the Energy Sector are a case in point. As currently proposed the new regulations would require complex calculations on each lease adding complication and significant expense,” said Fischer.
During the public comment period that ended September 13, representatives of the Oil & Gas Industry strongly echoed such concerns.
Beyond the Oil & Gas Industry, the proposed rules would have major impact on the way a large segment of businesses account for lease costs in calculating earnings, could add debt to their balance sheets, and would require some companies to revise their debt agreements with lenders. A final rule could come by year end with effective implementation by 2017.
From all of us at Weinberg & Company…
WARM WISHES FOR A HAPPY THANKSGIVING
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Weinberg & Company is a leading, international, full service, multi-office CPA firm serving clients throughout the United States and the Pacific Rim. Founded over two decades ago, the practice groups include: Assurance and Audit, Tax and Accounting, and Advisory Services. Weinberg has a depth of knowledge and experience to meet the needs of both public and privately held companies, high net worth individuals, entrepreneurs, family offices, and can provide customized business management services. www.weinbergla.com
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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