The result? In the aggregate, restaurant sales in October are flat. Total sales for October 2009 increased less than 1% over sales for October 2008.

How are individual restaurants doing? Of the 52 restaurants surveyed 24 or 46% of the total recorded increased sales over October 2008. Twenty-six restaurants or 50% of the sample showed decreased sales compared to last October. Two restaurants showed no change in sales.

We also looked at how these restaurants are doing year-to-date 2009 compared to 2008. The results are sobering. We narrowed the sample to 48 restaurants. Of the 48, only 10 or 21% of the sample had 2009 sales higher than year-to-date 2008 sales. Thirty-eight restaurants or 79% of the sample showed decreased year-to-date sales compared to 2008!

Conclusion: By October 2008 the national recession had seized the local restaurant market. Consumers were reining in their spending. Restaurant sales were already headed down. In October 2009 while total restaurant sales are not getting worse; they are not getting better either. We are “bumping along the bottom” – the sales “bottom” created when the recession latched on to consumers’ wallets.

The Sample: The 52 restaurants were drawn 90% from the metro Atlanta market. The sample includes restaurants in the fast casual, casual and fine-dining market segments. All sales were reconciled and therefore carry a high degree of accuracy. Aggregate sales from the sample for October 2009 were $9.01 million. For October 2008 aggregate sales were $8.95 million.

Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com. www.netfinancials.com

While in San Francisco last week and looking for a place to hide during a rainy afternoon, I ducked into the SF Museum of Modern Art to spend 4 delightful hours. Though I like modern art, there is much of it I do not understand.

Puzzled by modern art

Often I get a call from a restaurant operator because her food costs are out of control. The operator knows her food cost is too high but does not know why. (What’s a good food cost? 32% of net sales unless we’re talking about a steak house in which case 37% is more appropriate.)

I’m delighted to stop by and investigate the mystery. We discuss operations. After a few minutes, I ask the operator whether she costed out the menu. That is, looked at each important menu item and determined the item’s plate cost. The operator says that, yes indeed she costed out the menu ….. when the restaurant first opened two years ago. Typically when I ask to see the plate cost calculations, they cannot be produced. Perhaps they haven’t been updated in years.

The first step to gaining control of food costs, portion control, kitchen waste, and menu pricing is to cost out the most important items on the menu. It sucks, because it’s math. But that can’t be helped. So if you’re concerned about food your cost, take the leap. I have attached a PDF worksheet for costing out a menu item. Plate Cost worksheet

“Fun” does not mean expensive. Everything a restaurant needs is right there. Take a twenty out of the til and, with a big show, award it to the server with the best sales last night. Or give the twenty to the server that had the highest number of covers or served the last martini. Simple stuff but catchy. The cornier the better. Create a sense of excitement and even friendly competition. How about when the manager makes a table visit, he picks out a party and offers them a bet? If the manager wins, the customer pays their tab – just as usual. If the customer wins, the manager buys their entree or appetizer. Talk about creating excitement!

There is a side benefit to making a restaurant fun – higher employee moral and lower turnover. What’s to lose?

By Robert Wagner, CPA

Uncle Sam Wants You! …… to buy equipment. Hard to believe, but true. Recently Congress passed and the President signed an extension of significant tax breaks on equipment purchases through 2009. So, buying a POS system gets you up-to-date technology and a very attractive tax deduction. Unless a business “elects out” of the tax breaks, your will write-off, i.e., get a tax deduction for, most or all of the equipment you purchase in 2009.

Give Yourself a Bonus

Bonus depreciation on equipment comes in and out of the tax laws depending on the economy. Allowing businesses to write off equipment rapidly is thought to be a good way to spur our economic recovery. Currently purchases of new, not used, equipment are subject to 50% bonus depreciation. That means if you buy new equipment in 2009, you immediately get to write off 50% of the purchase price. And then you depreciate the rest of the restaurant equipment; usually over 5 years.

So how does this work? Suppose you spend $10 thousand for a new POS system in 2009. First, take $5 thousand in bonus depreciation and then take “normal” depreciation of $1 thousand on the remaining $5 thousand tax basis. Result: for 2009 you spend $10 thousand for a POS and get $6 thousand or more in depreciation expense your tax return. That’s a 60% write-off in the first year of ownership!

What if you are operating at a net loss in 2009? You may be able to take the loss (generated partly by bonus deprecation) and get a refund of the taxes you paid the government in prior years. This is a complicated area so it’s essential you consult your tax advisor.

Write Off 100% of Your POS

The amount of equipment a small business can elect to write off in 2009 is increased to $250 thousand. So your entire purchase of a POS could easily be written off in 2009. This tax break is harder to qualify for but many businesses might overlook it. The really good news is this tax break works for purchases of both new and used equipment.

However, qualifying for this tax break, called the Section 179 Election, is harder than qualifying for bonus depreciation. The business must jump the following hurdles:

• Section 179 depreciation cannot cause or increase a tax loss for the year so the business must be profitable to qualify
• The business does not qualify if more than $800 thousand in furniture, fixtures and equipment was purchased in 2009
• The equipment cannot be purchased from a related party

Really savvy operators are combining bonus deprecation and Section 179 expensing to maximize tax deductions on equipment purchases and minimize their taxes.  Contact your tax adviser for more info on how these tax breaks can make your POS purchase even more attractive.

Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com

Remember the “Tax Gap”?  When in Spring, ’07, the IRS told Congress that taxpayers were cheating on taxes by $290 billion a year?  Congress and the Bush administration got worked up about the tax cheats among us. To address this horrible situation the IRS recommended – surprise! – increasing its own budget. Today we are stuck with a wave of tax audits stemming from an increase in the IRS budget.

Here are five steps to remember when you get the IRS audit notice.

1.  Don’t Panic.  Don’t Pull an Ostrich – If you get an audit letter from the IRS, respond as soon as possible. Ignoring the IRS is not a prescription for success. The IRS will not go away if you pretend that they are not there!   In fact, the auditor may just get hurt feelings – not a positive development.  One taxpayer ignored all those pesky IRS notices; it cost him about $10 thousand.

2.  Be Professional. Hire a Professional – It’s OK to think that the IRS agent is a bloodsucker after your money. But it’s NOT OK to tell that to the IRS agent. It will not help your cause even if you feel better.  The IRS agent has a number of tools to deal with cranky taxpayers including the tax fraud statutes. You don’t want to go there! Treat each IRS agent as a professional, affording her the courtesy of a prompt and civil reply to each request.

Use an experienced tax professional to represent your interests. If you are tempted to represent yourself, just remember the adage that “He who represents himself in court has a fool for a client.”

3.  Control the Audit.  Document Everything – Even when dealing with the IRS agent you have rights. An agent may be unfamiliar with the IRS’s own rules of process and procedures. Just because the agent asks for something does not mean you have to provide it. An experienced professional can analyze each IRS request and suggest an appropriate response.  Every significant communication with the IRS agent should be in writing. If issues with the agent come up later, your documentation will be a life-saver.

4.  Don’t Expect the Audit to End Soon – The IRS is now trying to wrap up tax audits in 120 days from start to finish. But don’t be fooled. We know of one IRS audit that’s been going for ten months with no end in sight. An IRS agent works 5 or 6 hours a day; so it takes  a while to open, work and close an audit.

5.  You Have a Right to Appeal – Don’t antagonize the IRS agent. But if an agent is wrong or over-steps bounds, don’t hesitate to ask for a joint conference with the agent and supervisor. If you have a strong case and you don’t get satisfaction from the supervisor, consider appealing the decision. But, do so only with the help of an experienced tax professional.

We are seeing more IRS audits of restaurants than ever. Following a few simple steps will get you through this unpleasant process with the least amount of damage.

Robert Wagner, CPA is president of NetFinancials, Inc. which provides a full range of tax and accounting outsourced services for restaurant companies. Email: bob.wagner@netfinancials.com