Retail Industry ATG - Chapter 4: Examination Techniques for the Food and Beverages Industries (Pizza Restaurants)
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Income considerations will be similar to any other retail operation and will be determined by the internal controls in place. As with any retail business or operation that is cash intensive or where family members can remove currency from the register before sales are recorded, the examination must focus on income and internal controls.
The examiner should be alert for other sources of income, such as delivery sales, faxed orders, internet orders and take-out business. It would be easy to exclude the gross receipts from an entire type of sales. The examiner should question the taxpayer regarding the policy of accounting for each type of sales.
In many smaller and family owned pizza restaurants, documentation of income and expenses may be lacking. In all cases, the cash register tapes must be retained and income must be deposited intact. There must be sufficient documentation to verify the gross receipts reported on the tax return. If income records are unreliable the examiner will use the appropriate indirect method to estimate income.
One such method is the unit volume markup method. It may be necessary to contact the pizza restaurant suppliers to obtain the original purchase invoices on all identified cases. The ingredients purchased and used in the making of pizzas and grinders are used to determine total pizza and grinder sales.
Cost of Goods Sold
As with any restaurant, the examiner should obtain a copy of the menu and review the prices of all menu items with the taxpayer to identify the best selling items and determine the cost of the ingredients.
Purchases may be paid in cash so the examiner should note the extent of cash payments. If purchase invoices are not available third-party contacts can be made, after notifying the taxpayer, to secure an accurate cost of goods sold. As with other restaurants, if cost of goods sold is understated by the examiner then an indirect method for determining income will also understate gross receipts.
The number of pizza boxes used will be a factor in any markup calculation, so the examiner must accurately establish this element of cost of goods sold. It will be necessary to know the number of pizzas that can be made from 100 pounds of flour, since flour deliveries are fairly standard orders in this business The owner will know exactly how much flour is needed to make the dough for the day-to-day pizza orders.
When employees and suppliers are paid in cash, ensure that employment and information returns were filed. In the absence of proper reporting, the taxpayer will have a difficult time proving the expense is actually a bona fide business expense.