How Tax Reform Will Impact Restaurants

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