How the Tax Reform will Impact Restaurants
By Adam Berebitsky, Jeff Tubaugh, Lisa Haffer
BDO USA, LLP
On December 22, 2017, the conference version of the tax reform bill was signed into law, marking the largest change to U.S. tax policy in decades.
With most of the provisions set to go into effect in 2018, it’s important that the restaurant industry review the changes that occurred during the conference process to understand the impact to their companies.
What changes are coming for restaurants?
To help organizations navigate the key provisions affecting restaurants, we’ve summarized top considerations and implications below.
| Provision | Summary of Changes | Implications for Restaurants |
| Reduce the Corporate Tax Rate | Reduces higher corporate rates (max 35%) to a flat rate of 21%. Effective date: Taxable years beginning after Dec. 31, 2017. |
Industry View: Positive What’s at stake: This will reduce the tax burden for restaurateurs structured as C corporations. |
| Pass-Through Tax Treatment / Section 199A | A new deduction of 20% of “qualified business income” from a partnership, S corporation or sole proprietorship. Effective date: Taxable years beginning after Dec. 31, 2017. |
Industry view: Positive What’s at stake: A 20% reduction from taxable income reduces the maximum individual tax rate on pass-through income from 37% to 29.6%. |
| Limitations on Interest Deductibility | Generally, caps deduction of interest expense to the sum of 1) business interest income; 2) 30% of adjusted taxable income (computed without regard to deductions allowable for depreciation, amortization, or depletion; and 3) the taxpayer’s floorplan financing interest for the tax year. Disallowed interest is carried forward indefinitely. Contains a small business exception. Effective date: Taxable years beginning after Dec. 31, 2017. |
Industry View: Negative What’s at stake: This would limit the interest deduction to 30% of EBITDA for four years, then 30% of EBIT thereafter. Taxpayers who are using debt to fund new restaurant openings and incurring significant start-up expenses for new locations within the same taxable entity could find themselves deferring the interest expense deduction as a result of lower taxable income. |
| Repeal of Domestic Production Activities Deduction (DPAD or Section 199) | DPAD was a tax incentive for businesses that manufactured property at least partially within the United States. This could include restaurant commissaries. Effective date: Taxable years beginning after Dec. 31, 2017. |
Industry View: Negative What’s at stake: This mainly impacts commissary kitchens. This rule allowed commissaries to sell prepared items to a restaurant for a profit, then deduct 9% of their qualified production activities income from the commissary. |
| Eliminate Ability to Carryback Net Operating Losses and Limitation on Use of Net Operating Losses Against Future Income | An NOL deduction is limited to 80% of taxable income (determined without regard to the deduction). The two-year carryback provision has been eliminated so restaurants can only carry losses forward. Losses can be carried forward indefinitely. Effective date: The elimination of carrybacks and reduction to 80% of taxable income use in future years are both effective in taxable years beginning after Dec. 31, 2017. |
Industry View: Negative What’s at stake: Costs incurred in one year will not be able to offset 100% of taxable income in the next year. In situations where restaurateurs earnings are volatile, the restrictions on the carryback and use of NOLs could present a significant cash flow obstacle. |
| Bonus Depreciation | Companies will be able to fully expense certain capital expenditures, including acquisitions of used property, starting with assets placed in service after Sept 27, 2017. Effective date: 100% expensing of property is effective for assets placed in service after Sept. 27, 2017, through Dec 31, 2022. The percentage of allowable expensing will be phased out at a rate of 20% per year from 2023 (80%) to 2026 (20%). |
Industry View: Positive What’s at stake: This is likely to encourage more capital spending, potentially driving up remodels. There is no limitation on the amount taken. The taxpayer may elect out of bonus depreciation. |
| Increased Section 179 Expensing | For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million from $500,000. Effective date: Taxable years beginning after December 31, 2017. |
Industry view: Positive What’s at stake: This expansion was intended to encourage improvements of property. It also implies larger depreciation deductions for companies able to use Section 179 (and bonus depreciation). |
| Work Opportunity Tax Credit | The House had a provision in their bill to eliminate the credit, but the final result is no change in this valuable credit for restaurants. The WOTC is a tax credit available for employers hiring individuals from one or more of ten targeted groups of employees. It’s important to keep in mind that the WOTC remains slated to expire for employees that begin work on or after Jan. 1, 2020. |
Industry view: Positive |
| FICA Tip Credit | The House had a provision in their bill to increase the wage minimum for the calculation to go from $5.15 per hour to current federal minimum wage of $7.25 per hour, reducing the benefits of the credit for taxpayers operating in most states. The final result is no change in this valuable credit for restaurants. | Industry view: Positive |
Tackling Tax Reform: Initial steps restaurants can take now
Tax professionals are busy assessing changes caused by this bill, and are waiting for additional guidance on many key provisions to ensure the overall impact is fully understood. In the interim, here are two tips for restaurants to consider to begin tackling tax reform:
- Establish priorities. When considering what to undertake in the coming months, focus on the areas that could have the greatest impact on your organization. Consider your expansion plans and remodels, factoring in the write-offs that are now available. It would also be wise to look at how your businesses tax liability will change: C corporations can measure expected tax payments, and S corporations and partnerships can look at tax distributions to see how that will change this year.
- Initiate tax reform conversations with your tax advisor. Tax reform of this magnitude is the biggest change we’ve seen in a generation, and will require intense focus to understand not only how the changes apply at a federal level, but also to navigate the ripple effect this is likely to have on state taxation as well.
This article originally appeared in BDO USA, LLP’s “Selections” blog (January 12, 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com
