ACCOUNTING POLICY AND PROCEDURE MANUAL

Click on the sample SOPs that are in red text to hyperlink to that policy. Press Control-Home together to return to the top of the page. ACCOUNTS PAYABLE AND PURCHASING: AP 100 CHECKBOOK ACCOUNTING AP 102 PURCHASE REQUISITIONS AND PURCHASE ORDERS AP 104 RECEIVING OF GOODS AND SERVICES AP 105 TRAVEL AGENT COMMISSIONS AP 106 DISBURSEMENTS VIA CHECK, WIRE TRANSFER OR ACH AP 115 EMPLOYEE EXPENSE REPORTS AP 120 ADVANCE DEPOSITS AP 125 VENDOR LETTERS AP 130 CAPITAL EXPENDITURES, EXCLUDING CAPITAL LEASES AP 135 OWNER STATEMENTS & DISBURSEMENTS (CONDOHOTELS) AP 140 PREPAID EXPENSES AP 145 ACCRUED LIABILITIES AP 150 VENDOR STATEMENT RECONCILIATION AP 155 CHECK STOCK CONTROL AP 160 CRITICAL DATE LIST OF RECURRING EXPENSES AP - 165 SALES, USE AND OCCUPANCY TAX REPORTING ACCOUNTS RECEIVABLE CONTROL: AR 100 CREDIT POLICY AND DIRECT BILLING AUTHORIZATION PROCESS AR 105 DIRECT BILLING AND COLLECTION PROCESS AR 107 ACCOUNTING FOR CITY LEDGER TRANSACTIONS AR 110 GUEST LEDGER CREDIT POLICY AND PROCEDURES AR 115 GUEST LEDGER ADJUSTMENTS AND TRANSFERS AR 118 ACCOUNTING FOR CREDIT CARD RECEIVABLES AR 120 ACCOUNTING FOR CREDIT CARD CHARGE-BACKS AR 125 ACCOUNTS RECEIVABLE AGING STANDARDS AR 130 RESERVE FOR DOUBTFUL ACCOUNTS AR 135 EMPLOYEE WAGE ADVANCES AR - 140 EMPLOYEE TRAVEL ADVANCES Click on a policy number to hyperlink to that policy. Press Control Home at any time to bring the cursor back to the top of the Index.

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CASH CONTROL: CASH 100 EMPLOYEE ISSUED HOUSE BANK FUNDS CASH 105 DROP SAFE PROCEDURES CASH 110 CASHIER OVER/SHORT REPORTING CASH 112 DAILY CASH, CHECK AND CREDIT CARD DEPOSITS CASH 115 ARMORED CAR TRANSPORT OF HOTEL FUNDS CASH 120 SAFE AND HOUSE FUND STORAGE BOX ADMINISTRATION CASH 125 CHECKS RECEIVED IN MAIL CASH 127 WIRE TRANSFERS RECEIVED CASH 130 PETTY CASH CASH 135 BANK ACCOUNT ESTABLISHMENT CASH 140 BANK ACCOUNT RECONCILIATION DEPOSITORY ACCT CASH 142 BANK ACCOUNT RECONCILIATION CREDIT CARD ACCT CASH 144 BANK ACCOUNT RECONCILIATION CHECKING ACCOUNTS CASH 150 VENDING MACHINE PROCEDURES OPERATED DEPARTMENT CONTROLS: OPS 105 LABOR SCHEDULING, REPORTING AND CONTROL OPS 110 HOUSEKEEPING DISCREPANCY REPORT OPS 120 FOOD AND BEVERAGE INVENTORIES OPS 125 FOOD AND BEVERAGE STORAGE AND REQUISITION OPS 127 FOOD OUTLET CONTROLS OPS 129 BEVERAGE OUTLET CONTROLS OPS 130 BANQUET CONTROLS OPS 132 EMPLOYEE CAFETERIA COSTS OPS 135 ACCOUNTING FOR PROMOTIONAL CHARGES OPS 145 GIFT CERTIFICATES OPS 150 INCOME AUDIT PROCEDURES OPS - 155 INVENTORY OF RETAIL OUTLETS PAYROLL CONTROLS: PR 100 PAYROLL PROCESSING PR 110 PAYROLL GARNISHMENTS PR 115 PAYROLL CHECK/DIRECT DEPOSIT DISTRIBUTION PR 120 TIP REPORTING AND PROCESSING FOOD AND BEVERAGE OUTLETS PR 125 BANQUET SERVICE CHARGES AND MISC GRATUITIES PR 130 MANAGERS RESPONSIBILITIES FOR PAYROLL DATA Click on a policy number to hyperlink to that policy. Press Control Home at any time to bring the cursor back to the top of the Index.

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ADMINISTRATIVE POLICIES: ADM 100 CONTRACT, LEASE AND LICENSE ADMINISTRATION ADM 110 RECORD RETENTION SCHEDULE ADM 115 SALES TAX EXEMPTION ADM 120 BALANCE SHEET RECONCILIATION ADM 130 GUEST PACKAGE RECEIVING AND SHIPPING ADM 135 TRADEOUT ACCOUNTING PROCEDURES ADM 140 UNCLAIMED CHECKS & ESCHEAT ADM 145 SAFETY DEPOSIT BOXES ISSUED TO GUESTS FORMS: FORM AR-105A FORM AR-105B FORM AR-105C FORM AR-105D FORM AR-105E FORM AR-110B FORM AR-135 FORM AR-140 FORM CA-100 FORM CA-102 FORM CA-105 FORM CA-112 FORM CA-125 FORM CA-127 FORM CA-140 FORM CA-142 FORM CA-144 FORM ADM-100 FORM ADM-130 CREDIT APPLICATION FORM CLIENT COLLECTION LOG COLLECTION LETTER #1 COLLECTION LETTER #2 COLLECTION LETTER #3 CREDIT CARD AUTHORIZATION FORM EMPLOYEE WAGE ADVANCE PROMISSORY NOTE EMPLOYEE TRAVEL ADVANCE PROMISSORY NOTE HOUSE BANK CONTRACT HOUSE BANK COUNT SUMMARY DAILY DEPOSIT DROP LOG DAILY CASH AND CREDIT CARD DEPOSIT WORKSHEET CHECKS RECEIVED IN THE MAIL LOG WIRE TRANSFERS RECEIVED LOG BANK ACCOUNT RECONCILIATION FORM - DEPOSITORY BANK ACCOUNT RECONCILIATION FORM CREDIT CARDS BANK ACCOUNT RECONCILIATION FORM CHECKING AC CONTRACTS, LEASES AND LICENSES SCHEDULE PACKAGE TRANSFER FORM

Click on a policy number to hyperlink to that policy. Press Control Home at any time to bring the cursor back to the top of the Index.

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SECTION: AP NUMBER: 102 PURCHASE REQUISITIONS AND PURCHASE ORDERS APPROVED: CFO Signature POLICY: It is the policy of the hotel to require the issuance of an approved purchase order prior to ordering any goods or services for the hotel. The only exceptions to this policy are consumable food and beverage items, items for which an approved check request has been issued in advance of the purchase, contractual obligations for which a properly authorized contract exists, or a single item or groups of items costing collectively less than $100.00. PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY: It is the Controller/DOFs responsibility to administer this policy, and the responsibility of each person charged with procuring goods or services for the hotel to adhere to this policy. PROCEDURE:
ILLUSTRATION AP-1 &2

EFFECTIVE DATE: 1/1/2005 ICQ REFERENCE:

For a complete illustration of the entire purchasing and receiving process, please review the flowchart on Illustration AP-1. The procedures below assume a paper PO system, but the same principles apply to an electronic system. 1) After determining if funds are available for the purchase of goods or services, (see SOP AP 100 Checkbook Accounting), a Purchase Requisition is completed by the person requesting the purchase. A Purchase Requisition details the information necessary to make a purchasing decision as follows: a) Vendor information including name, address and phone or e-mail contact information. b) Quantity, unit price, extended price of units. Cost of freight, sales tax, duties and the total cost of this purchase. c) Reason for purchase. d) The availability of funds for this purchase. On the purchase requisition, the fund availability area shows the checkbook prior balance, amount of this purchase, and balance remaining after this purchase. If adequate funds are not available, an explanation of which account category was reduced in order to increase the funds available for this purchase. Only the General Manager has the authority to override checkbook restrictions and approve purchases wherein adequate funds are not available in a departments forecast. 2) Purchases over $1,000 that are non-repetitive in nature require two bids from competing vendors. 3) Repetitive purchases for goods such as office supplies must be put out for competitive
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bidding on an annual basis. 4) Contract services such as maintenance contracts must be re-bid with at least three competitive bids as contracts expire. (See also SOP ADM 100-Contract, Lease and License Administration). 5) The Purchase Requisition is routed for approval as follows: a) Department Manager may purchase goods or services up to $100 without further approval.

b) Division Head (EC Member) must approve all departmental requisitions, and has approval level of up to $500 without further approval. Route requisition to A/P after signature. c) General Manager must approve all requisitions over $1000 in value. d) Controller must approve all requisitions over $500 in value. 6) If the Purchase Requisition is approved, a number is assigned to the requisition, at which point the requisition becomes a Purchase Order (PO). The PO is simply a purchase requisition that is fully signed and is assigned a Purchase Order Number. Nothing may be ordered by the hotel (excluding exceptions noted above) without a signed purchase order. The hotel reserves the right to refuse delivery of any good or service for which a signed purchase order has not been completed. (See also SOP AP-125 Vendor Letters.) 7) The Purchase Order is now routed to the Accounts Payable department for distribution of copies: a) Copy 1 (Original) is routed back to the originator to facilitate purchasing the items. The vendor should be sent a copy of this purchase order.

b) Copy 2 (Yellow) is routed to the Receiving Department and is filed in a temporary receiving file until goods are received. (See SOP AP 104 Receiving of Goods and Services). c) Copy 3 (Pink) remains in A/P to be filed numerically. 8) Goods or services are now ordered by the originator or the purchasing department (see breakdown on the following page).

The following products or services are typically ordered by the following individuals: 5 of 19

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Product or Service Food and Beverage consumable products Food and Beverage Linen, China, Glass, Silver Rooms Linen and Glassware Department Other Expenses Maintenance Contracted Services Capital Goods

Who Orders? Purchasing Department Food and Beverage Director/Director of Operations Rooms Director/Director of Operations Department Managers Director of Engineering GM, Controller or Director of Engineering

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SECTION: AR NUMBER: 100 EFFECTIVE DATE: 1/1/2005 CREDIT POLICY AND DIRECT BILLING AUTHORIZATION PROCESS ICQ REFERENCE: APPROVED: CFO Signature POLICY: Hotel Clients interested in establishing a direct billing relationship with the hotel must comply with the minimums, limitations and procedures set forth in this policy. PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY: It is the booking Sales Manager's responsibility to establish a method of payment prior to the groups arrival. The Director of Sales and Marketing, Controller/DOF and General Manager are responsible for administering and monitoring adherence to this policy. PROCEDURE: The method of payment must be addressed in the initial sales phase and the method of payment must be agreed to in the final sales contract. Direct Billing Privileges will only be granted to certain groups. For groups that will not be considered for direct billing and require payment in advance, the procedures to handle advance payments are as follows: Any events that fall into the category of Political, Sports, Theatre, Travel agencies, School functions (except as covered by a School District Purchase Order), Weddings, Bar/Bat Mitzvahs, Religious, Christmas Parties, Contests, any function depending upon ticket sales, and any business with total billable revenue under $5,000 will not be considered for direct billing. For such groups where payment in advance is required by policy, it is the booking Sales Managers responsibility to communicate this policy requirement to the client during initial phase of the sales process. The booking Sales Manager must ensure that full payment is received 5 days prior to the start of the event. This may be in the form of cash, credit card or company/personal check. (Accounts Receivable is responsible for getting check guarantee approval for all checks received within the last 10 days prior to the groups event, and for obtaining credit card approval for the amount of the prepayment at least 5 days before the function.) Any payments made after this 5-day window must be in the form of cash or cashiers check a minimum of 3 days (72 hrs.) prior to the groups arrival. FULL PRE-PAYMENT must be received a minimum of 3 working days prior to the start of the event or the event will not take place.

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Government, Military and School District Purchase Orders will be accepted in lieu of a Credit Application to establish a direct billing relationship with the hotel. The booking Sales Manager is responsible to ensure that the Purchase Order is sufficient to cover all charges, including sales tax. (In general, such groups are not exempt from sales/occupancy tax. See SOP ADM-115 Tax Exemption). Credit Card Payment Events may be paid by credit card upon completion of a credit card authorization form (Form AR110B) and MUST include copy of the front and back of the card. The credit card authorization must include an estimate of anticipated charges. Account Receivable is responsible to obtain a credit card authorization code three (3) business days prior to the start date of the event. The final balance will be charged by AR the day after the event. It is imperative that the booking Sales Manager notify AR if the anticipated charges vary from this original amount.
C D C RE IT ARDAU TH Direct Billing Authorization Process: Direct Billing privileges will be extended to groups that do not fall under the prepayment requirement policy outlined on the prior page, and that are approved by the Controller or General Manager in accordance with the following procedures:

1) A credit application (Form AR-105A) must be sent to the client by the booking Sales Manager, completed by the client and returned and reviewed by the booking Sales Manager. Once reviewed, the booking Sales Manager forwards the application to Accounting, retaining a trace file copy for the sales file. The application must be returned by the client no later than 30 days prior to arrival of the group. (For internal purposes, a minimum of 21 days in advance is required.) 2) The credit application must be processed by Accounts Receivable, and acceptance/denial of the application communicated back to the booking Sales Manager at least two (2) weeks prior to the arrival of the group. It is recommended that the process of checking the clients credit be outsourced to a company that processes such credit applications for the hotel industry. 3) If processing the credit application is done in-house, at least two hotel references must be contacted to determine the clients payment history, and the clients bank must be contacted to provide the clients bank history. The application is then forwarded to the Controller for a credit decision. 4) In the event that the Controller denies the application, the decision may be appealed to the General Manager who has final say on the billing decision. If the GM chooses to override the Controllers decision, the Controller is not responsible for the final outcome of the billing process, but will make every attempt to collect the amount due.

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Ensuring that all Hotel Groups, Banquet or Catering Groups have a form of payment: Each week the hotel is to conduct a BEO Review Meeting. A representative from the Accounts Receivable function of the hotel must attend this meeting. The purpose of the A/R persons attendance is twofold: 1) To ensure that each group coming to the hotel has an approved form of payment in advance of their arrival. 2) To gain intimate knowledge of the group that will assist in the billing process. If an approved form of payment has not been determined for each group, banquet or catering event to arrive at the hotel in the next 10 days, immediate action by the booking Sales or Catering Manager must take place, and the manager must notify Accounts Receivable immediately upon receipt of the form of payment.

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SECTION: CASH NUMBER: 105 DROP SAFE PROCEDURES APPROVED: CFO Signature POLICY: The purpose of this policy is to protect the cash assets of the hotel, and to provide a written audit trail to protect the cashier. All cash, check and voucher deposits are to be completely logged onto the Daily Deposit Drop Log. PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY: Each individual cashier is responsible to secure a witness and perform a drop of their cash, checks and vouchers into the hotels drop safe immediately following their work shift, and to verify that the deposit has fallen safely into the drop safe. The Controller and General Cashier are responsible for properly retrieving daily deposits that are dropped by cashiers. PROCEDURE: Individual Cashiers Procedures:
CA-105 DAILY DEPOSIT DROP LOG

EFFECTIVE DATE: 1/1/2005 ICQ REFERENCE:

1) Once a cashier has counted their house bank funds and separated those funds from the cash and checks that they are going to deposit (drop) at the end of their shift, they are responsible to prepare a Cashiers Report envelope listing the contents and total amount of funds to be dropped. 2) The cashier is to secure a witness before the drop can be made. 3) In the presence of the witness, the cashier is to list their name, outlet (department), time and amount of their deposit on the Daily Deposit Drop Log (see Form CA-105). Amounts due back to the cashier should be listed on the Daily Deposit Drop Log in (parentheses). The cashier then places the deposit envelope in the drop safe, and obtains the witness signature on the Daily Deposit Drop Log. Deposits made without a witness signature subject the cashier to disciplinary action. 4) A Daily Deposit Drop Log must be kept at the drop safe at all times. If one is not present, a supervisor must secure one. 5) Cashiers should never drop their deposit simultaneously with other individuals making a deposit. This has the potential to cause confusion during the drop process. 6) The last cashier dropping their cash for the day, (usually the night desk clerk/auditor), is requested to drop the Daily Deposit Drop Log into the drop safe for later retrieval by the General Cashier.

Daily Drop Safe Retrieval Process:

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1) See SOP CASH 120 SAFE AND HOUSE FUND STORAGE BOX ADMINISTRATION for dual access to the drop safe requirements, and other administrative requirements. 2) The drop safe must be opened and the contents documented by two people at all times. Never should either party to the safe pull be distracted or leave the area. 3) Once the contents are pulled from the drop safe, one person counts the envelopes for the day, while the other person counts the number of witnessed drops that appear on the Daily Deposit Drop Log. If the two counts do not match, the envelopes must be verified against the Drop Log to determine if a drop is missing. If a drop is missing, an Executive Committee member must be contacted before leaving the room, and the EC person must verify that the drop is missing. If the count of envelopes matches the count on the Drop Log, then the number of envelopes retrieved is documented on the drop log, and the two people retrieving the envelopes must each sign the Drop Log. 4) The two must lock the drop safe, and walk together back to the General Cashiers office for security purposes.

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SECTION: OPS NUMBER: 129 OUTLET BEVERAGE CONTROLS APPROVED: CFO Signature POLICY:

EFFECTIVE DATE: 1/1/2005 ICQ REFERENCE:

This organization will consistently follow the control procedures herein listed in all beverage outlets under its management. PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY: The Controller/DOF is primarily responsible to ensure that a comprehensive system of internal controls is put into operation within all food and beverage outlets. The Director of Food and Beverage is responsible to ensure that the controls put into operation are consistently implemented and put into practice in all food and beverage outlets. PROCEDURE: The following list of internal controls, or acceptable variations thereof, is to be put into operation and consistently implemented in all food outlet operations. Purchasing Procedures and Controls: All purchasing policy and procedure guidelines are to be followed in accordance with SOP AP 102 - Purchase Requisitions and Purchase Orders. Par Levels are to be established by the person in charge of Purchasing, and signed off by the Food and Beverage Director. The par levels should be set at an amount that is sufficient to order enough stock to supply the beverage operation in normal operating conditions. Any changes made to beverage pars, including wine, liquor or beer menu changes that affect beverage inventory must be approved by the General Manager, Food and Beverage Director and Controller/DOF. Prior to stocking supplies related to any menu changes, a plan for the dissolution of old stock on hand must be presented by the Food and Beverage Director to the General Manager and Controller for approval. Prior to placing orders with beverage vendors, any adjustments for special event beverage sales such as New Years Eve, weddings, etc., must be considered and the purchase adjusted accordingly. Purchase quantities should be adjusted to take advantage of any vendor discounts or special promotions being offered, after approval by the Food and Beverage Director.

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Receiving Procedures and Controls: All receiving policy and procedure guidelines are to be followed in accordance with SOP AP-104 Receiving of Goods and Services. All beverage product received must be received by an approved Manager/Supervisor. As items are received they must be checked as follows: o Each item must match the ordered specification with regard to brand and size of container. o Each item must be verified to the quantity ordered. o Each item must be verified to the invoice. o Items purchased by quantity per case must be verified to the case received. For any items listed on the invoice that did not meet specification standards, or were simply not delivered, a credit memo must be completed immediately, before the delivery person leaves the property. The credit memo must state the following: o The reason for the credit, i.e. item not delivered, item did not meet quality standard, etc. o The signature of the driver. o The amount of the credit in quantity, price and extended total credit amount. A credit log must be maintained and reconciled with the general ledger on a weekly basis. o A Receiving Log must be prepared , and many more receiving procedures are included in the actual SOP manual. Requisitioning Beverage from Storage: Beverage requisitions must be filled out by the night shift for each beverage outlet and left for the Receiving department to fill the next day. Liquor requisitions must be accompanied by an empty bottle for each bottle of liquor being requested from inventory. Liquor requisitions will only be filled in a bottle-for-bottle exchange. When liquor is being issued to outlets, the Receiving person filling the requisition must examine the bottles to find the non-removable sticker on each bottle. Any empty bottles without the hotels unique tag will be reported to the Controller/DOF and Food and Beverage Director. For wine being requisitioned, a system of comparing bottles of wine sold individually and by the glass as evidenced by the Beverage Abstract Reports from the Point of Sale system for the prior day to the requisitioned bottle count must be maintained. Wine should then be issued according to the Abstract Reports.
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A bin tag system should be utilized for all outlet wines. Bar pars must be spot checked weekly to ensure proper stock and to look for bottle tags. Inventory and Storeroom Control: Keys to beverage storeroom(s) should be available only to the Beverage Purchaser, Beverage Management and Food and Beverage Director. All beverage storage areas must be kept secured at all times. And many more inventory and stockroom controls are featured in the actual SOP manual. Cost Management Controls: Pricing Controls: Wine menus must be cost-extended prior to implementation of any menu item to ensure proper pricing. Liquor, beer and soda pricing must be reviewed at least semi-annually. Dispensing Controls: Liquor dispensing systems must be calibrated at least quarterly. Where dispensing systems are not used, all liquor must be poured using a one ounce jigger, and tails will not be allowed. All liquor pours must be made using an approved one ounce standard stainless steel jigger. No free-pouring is allowed. All liquor, wine, beer and soda dispensing systems must be turned off, secured or otherwise disabled after closing. Sales and Receipt Controls: Point of Sale systems must have a display that is clearly visible to customers. All drink orders must be rung up immediately upon order. No delay should exist between the time a drink is ordered and the time a drink is entered into the Point of Sale system. All drink orders called to bartenders must be accompanied by a Point of Sale drink ticket or chit. All drink orders must be redlined or otherwise defaced or torn after service to prevent re-use of the chit or ticket. All cash drink checks must be placed in a lock box after cash is collected to prevent re-use. The cash drawer must be closed between transactions.

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Plus 15 more Sales and Receipt Controls in the actual SOP Manual.

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SECTION: PR NUMBER: 120 EFFECTIVE DATE: 1/1/2005 TIP REPORTING AND PROCESSING FOOD AND BEVERAGE OUTLETS ICQ REFERENCE: APPROVED: CFO Signature POLICY: It is the policy of this organization to be in compliance with all tip reporting regulations established by the Internal Revenue Service regarding employees in tipped positions. An agreement with the IRS will be signed by the CFO detailing the compliance requirements under either the Tip Rate Determination Agreement (TRDA) or the Tip Reporting Alternative Commitment (TRAC). PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY: It is the responsibility of the Corporate Controller or CFO to obtain and sign a tip reporting agreement with the IRS, or to develop a system acceptable to the IRS for reporting tips. The hotel Controller/DOF is responsible to comply with the reporting requirements established by the agreement signed with the IRS. PROCEDURE: Federal law requires that all employees must report all tips received. This law encompasses all employees in all positions where tips are received. In this policy, we are specifically addressing the required tracking, reporting and allocating of tips in food and beverage outlets. Banquet gratuities and service charges, bellman gratuities and housekeeper gratuities are not included in this policy, but are detailed in SOP PR 125 - Banquet Service Charges and Miscellaneous Gratuities Food and Beverage outlets: Based on the agreement signed with the IRS (TRDA or TRAC), related systems must be established within the organization to comply with the reporting and tracking requirements in the agreement. Assuming that the TRAC agreement is signed, the requirement is that all employees in a tipped position are to be given a statement of gross receipts, charge sales and charge tips, as shown on the attached Example of a TRAC Statement from the IRS. In addition to the TRAC agreement requirements, IRS tip reporting requires that the employer track the following information for the employee: Gross Sales by Employee Charge Sales by Employee (Charge sales include sales paid by credit card or charged to a guest room. Charge Tips (Tips on charge sales from above) Cash Tips reported by the employee

Declared tips are those cash and charge tips reported to the employer. For Food and Beverage 16 of 19

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Servers, charge tips are automatically declared, less any indirect tips paid out (to buspersons, bartenders, bar-back attendants, etc.). For employees receiving tips indirectly from food or beverage servers, only cash tips will be reported. Using the TRAC reporting system, the employee is required to declare their tips each day. Then, at a minimum on a monthly basis, the employee must be presented a report showing their gross sales, charge sales, charge tips, declared cash tips and tips paid out to attendants. This information is accumulated for reporting the annual Form 8027 to the IRS. Form 8027 is a memorandum form filed with the IRS that will show any tip declaration shortfalls of less than 8% of gross reportable sales, and will allocate tips based on relative sales and tips declared by employees. This shortfall will show up on the employees W-2 as allocated tips. This form (8027) must be completed by the Controller/DOF each year. Below is an excerpt from the IRS instructions defining what is to be included in Gross Receipts and when to allocate tips.
Gross Receipts

Gross receipts include all receipts (other than nonallocable receipts, see definition below) from cash sales, charge receipts, charges to a hotel room (excluding tips charged to the hotel room if your accounting procedures allow these tips to be separated), and the retail value of complimentary food or beverages served to customers as explained below.

Also include charged tips in gross receipts, but only to the extent that you reduced your cash sales by the amount of any cash you paid to tipped employees for any charged tips due them. However, if you did not reduce cash sales for charged tips paid out to employees, do not include those charged tips in gross receipts. Do not include state or local taxes in gross receipts.

Remind all directly and indirectly tipped employees to include all charged tips and all cash tips received in the tip amount that they must report to you. Nonallocable receipts. These are receipts for carryout sales and receipts with a service charge added of 10% or more. (Nonallocable receipts generally include all sales on which tipping is not customary). Complimentary items. Food or beverages served to customers without charge must be included in gross receipts if: (a) tipping for providing them is customary at the establishment, and (b) they are provided in connection with an activity that is engaged in for profit and whose receipts would not be included in the amount on line 5 of Form 8027. For example, you would have to include in gross receipts the retail value of the complimentary drinks served to customers in a gambling casino because tipping is customary, the gambling casino is an activity engaged in for profit, and the gambling receipts of the casino are not included in the amount on line 5. However, you would not have to include the retail value of complimentary hors d'oeuvres at your bar or a complimentary dessert served to a regular patron of your restaurant in gross receipts because the receipts of the bar or restaurant would be included in the amount on line 5. You would not have to include the value of a fruit basket placed in a hotel room in gross receipts since, generally, tipping for it is not customary.

Allocation of Tips

You must allocate tips among employees who receive them if the total tips reported to you during any payroll period are less than 8% (or the approved lower rate) of this establishment's gross receipts for that period.

Generally, the amount allocated is the difference between the total tips reported by employees and 8% (or the lower rate) of the gross receipts, other than nonallocable receipts.

Lower rate. You (or a majority of the employees) may request a lower rate (but not lower than 2%) by submitting an application to: Internal Revenue Service Compliance Policy Group S:C:CP:RC:ET, Room 2404 1111 Constitution Ave. NW Washington, DC 20224 The burden of supplying sufficient information to allow the IRS to estimate with reasonable accuracy the actual tip rate of the establishment rests with the petitioner. Your petition for a lower rate must clearly demonstrate that a rate less than 8% should apply. It must include the following:

Employer's name, address, and EIN; Establishment's name, address, and establishment number; Detailed description of the establishment that would help to determine the tip rate. The description should include the type of restaurant, days and hours of operation, type of service including any self-service, the person (waiter or waitress, cashier, etc.) to whom the customer pays the check, whether the check is paid before or after the meal, and whether alcohol is available; Past year's information shown on lines 1 through 6 of Form 8027 as well as total carryout sales; total charge sales; percentage of sales for breakfast, lunch, and dinner; average dollar amount of a guest check; service charge, if any, added to the check; and the percentage of sales with a service charge; Type of clientele;

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Copy of a representative menu for each meal.

The petition must contain the following statement and be signed by a responsible person who is authorized to make and sign a return, statement, or other document. Under penalties of perjury, I declare that I have examined this application, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this petition are true, correct, and complete. You must attach to the petition copies of Form 8027 (if any) filed for the 3 years prior to your petition. If you are petitioning for more than one establishment or you want to know your appeal rights, see Revenue Procedure 86-21, 1986-1 C.B. 560 for additional information. Also include with your petition a check or money order made payable to the United States Treasury for the amount of the user fee required for determination letters. For the current user fee amount, contact the IRS at 1-800-829-1040. A majority of all the directly tipped employees must consent to any petition written by an employee. A majority of employees means more than half of all directly tipped employees employed by the establishment at the time the petition is filed. Employee groups must follow the procedures in Regulations section 31.6053-3(h), Pub. 531, Reporting Tip Income, and Revenue Procedure 86-21. The IRS will notify you when and for how long the reduced rate is effective.

Reporting Allocated Tips To Employees

Give each employee who has been allocated tips a Form W-2 that shows the allocated amount in box 8. The form must be furnished to the employee by January 31 of the following year. If employment ends before the end of the year and the employee asks for the Form W-2, a tip allocation is not required on the early Form W-2. However, you may include on the early Form W-2 the employee's actual tip allocation or a good-faith estimate of the allocation. Signify a good-faith estimate by writing estimate next to the allocated amount in box 8 of the Form W-2.

If no allocation was shown on the early Form W-2 or if the estimated allocation on the early form differs from the actual amount by more than 5%, give the employee Form W-2c, Corrected Wage and Tax Statement, during January of the next year.

If you allocate tips among employees by the methods described in the instructions for lines 7a through 7c, you are not liable to any employee if any amount is improperly allocated. However, if the allocation shown on the employee's Form W-2 differs from the correct allocation by more than 5%, you must adjust that employee's allocation and must review the allocable amount of all other employees in the same establishment to assure that the error did not distort any other employee's share by more than 5%. Use Form W-2c to report the corrected allocation.

You do not need to send to the IRS separate copies of Forms W-2 showing allocated tips. The IRS will use the information shown on the Forms W-2 that you file with the Social Security Data Operations Center.

Tip allocations have no effect on withholding income or social security or Medicare taxes from employees' wages. Allocated tips are not subject to withholding and are not to be included in boxes 1, 3, 5, and 7, of Form W-2.

In summary, the formula for tip allocation is as follows using broad example numbers: 1. 2. 3. 4. 5. Employee Employee #1 Employee #2 Employee #3 Employee #4 Employee #5 Totals Aggregate Gross Receipts for the outlet 1,000,000 Multiply Gross Receipts by 8% 80,000 Deduct tips reported by Indirectly tipped employees (15,000) Net minimum tips to be reported by directly tipped ees 65,000 Tips reported by directly tipped employees and tracked gross receipts: Gross Receipts 100,000 250,000 200,000 250,000 200,000 1,000,000 % of Total Receipts Tips Reported 10% 25% 20% 25% 20% 100% 10,000 10,000 15,000 15,000 10,000 60,000

As you can see from the table above, there is an overall shortfall of $5,000 that must be allocated. To allocate the shortfall, you need to allocate the difference to those employees that underreported. The allocation formula using the above example amounts is as follows: Directly tipped EEs share Tips Reported Shortfall of 8% Gross Receipts 10% X 65,000=6,500 10,000 25% X 65,000=16,250 10,000 Employee 0 6,250

Employee #1 Employee #2

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Employee #3 Employee #4 Employee #5 Totals 20% X 65,000=13,000 25% X 65,000=16,250 20% X 65,000=13,000 65,000 15,000 15,000 10,000 60,000 0 1,250 3,000 10,500

Since the Employee Shortfall amount of $10,500 from the above table is greater than the required aggregate shortfall amount, an additional calculation must be completed to allocate the $5,000 shortfall so as not to penalize the employees that reported at least 8%. The calculation is as follows: Shortfall Ratio Allocation Employee #2 Employee #4 Employee #5 Totals 6,250/10,500 = 59.5% 1,250/10,500 = 11.9% 3,000/10,500 = 28.6% 100% Reporting Shortfall 59.5% X 5,000 = 2,976 11.9% X 5,000 = 595 28.6% X 5,000 = 1,429 5,000

The amounts for employees #2, #4 and #5 would be reported on form 8027 and appear on the employees W-2 as allocated tips. The employee is then responsible for FICA taxes on the shortfall, which amount to both the employers and the employees half of FICA, which doubles the employees FICA liability.

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