The Tax Cuts and Job Act of 2017 is the most dramatic change to the U.S. tax code in over 30 years. Tax reform will have a significant impact on both restaurants and employees. On the surface, it appears that the lower tax rates will result in increased demand from consumers who will have more money to spend. One can expect that restaurants will see an increase in revenue, as well as higher profits due to the lower tax rates. Consequently, this may reward employees with wage increases and bonuses. However, there are certain provisions of tax reform that may have a negative impact on restaurants. Some of the implications of tax reform on restaurants are covered below.
Reduction in the Corporate Tax Rate
One of the most talked about provisions is the reduction in the corporate tax rate. Prior to tax reform, the highest corporate marginal tax rate was 35%. Effective January 1, 2018, the corporate tax rate has been changed to a flat 21%. This change will reduce that tax burden for those restaurants that are structured as C Corporations. Additionally, the changes in the tax law allow for a new deduction of 20% of qualified business income from an S Corporation, partnership, or sole proprietorship. This is another positive change, as the 20% reduction from taxable income reduces the maximum individual tax rate on pass-through income from 37% to 29.6% effective for tax years beginning on January 1, 2018.
Depreciation and Expenses
Provisions in the new tax bill also focused on bonus depreciation and Section 179 expensing. Restaurants will be able to elect 100% bonus depreciation certain capital expenditures, including the acquisition of used property, on assets placed in service after September 27, 2017. In addition, for property placed in service in tax years beginning on January 1, 2018, the maximum amount a restaurant may expense under IRC Code 179 increases from $500,000 to $1,000,000. Both of these changes are viewed as positive changes for the restaurant industry. These changes will encourage improvements of property through the increased depreciation deductions. Additionally, the change in depreciation rules that allow restaurants to write off the cost of purchasing used property could lead to an increase in mergers and acquisitions.
The tax reform also left certain tax credits that are very attractive to restaurants in place without any changes. The Work Opportunity Tax Credit (WOTC), a tax credit available for employers hiring individuals from a certain list of targeted groups employees remains unchanged. Additionally, the valuable FICA Tip Credit will continue to use a $5.15 per hour minimum wage when calculating the credit for tax years beginning on January 1, 2018.
Negative Effects of Tax Reform on Restaurants
Certain provisions of the new tax bill will have a negative impact on restaurants. For example, effective in tax years beginning on January 1, 2018, the net operating loss (NOL) deduction will now be limited to 80% of taxable income. Restaurants will no longer be able to carry back NOLs generated in tax years beginning after December 31, 2017. However, NOLs may be carried forward indefinitely. Overall, these changes could present a significant cash flow obstacle to restaurants who see revenues fluctuate drastically on year-to-year basis
As restauranteurs learn the new tax rules, the process of tracking expenses and filing taxes will change as well, and many will look to seek the advice of a trusted tax professional.
Along with understanding the effects of tax reform on your restaurant, it may be a good time to brush up on common accounting equations for your business.