For restaurateurs, there are a lot moving parts to the Tax Cuts and Jobs Act to consider. When the Act was ratified, high-fives were the order of the day. To many it signaled a possible end to sluggish growth, or a golden ticket out of irrelevancy. But savvy restaurateurs are evaluating exactly how the Act impacts their overall tax position.
To help you navigate through some of these moving parts and identify how best to maximize potential benefits or minimize potential costs arising from it, continue reading to see some things that have and haven’t changed, and what you should consider when evaluating the impact the Act may have on your restaurant business.
So, What Hasn’t Changed?
For starters, the Work Opportunity Tax Credit (WOTC). This beneficial-but-often-ignored federal credit is for the hiring of certain classes of employees (low income, students, veterans, ex-cons). Previous WOTC provisions remain unchanged under the new tax law. Another federal credit that remains is the FICA Tip Credit. This is for employer FICA taxes paid on tips to employees.
So, What’s New?
Well, a lot of things. But since I’m on a strict word limit, it’s difficult to get to everything. For nitty-gritty details, consult a lawyer and a highly qualified tax professional. Here are some highlights:
Historically, this provision allowed for the immediate expensing of 50 percent of the cost of certain qualified property. The Act has significantly increased the benefits of this provision. Taxpayers are now able to deduct the entire cost of qualified assets acquired and placed in service after September 27, 2017. But don’t pop the champagne just yet. If you had a binding contract in place for property prior to September 28, 2017, that date will be considered the acquisition date for this purpose and your bonus depreciation on such assets will be based on the prior law.
It’s important to note that the Act expanded the type of property eligible for bonus depreciation to now include used property; historically, only “new” property was eligible. The used property must fit within one of the categories of qualified property and must be acquired and placed in service on or after September 28, 2017. The used property must not be property that was previously owned by the taxpayer and cannot be acquired from a related party.
Section 179 Deduction
The Act increased the expense limitation to $1 million (from $500,000) for additions for qualified assets placed in service after December 31, 2017. Additionally, the phase-out of this benefit does not begin to occur until there are $2.5 million (up from $2 million) of qualifying additions. The Act also broadened qualified property to now include certain real property, including roofs, HVAC, fire, alarm, and security systems.
All individual tax brackets were reduced, with the highest rate – that for individuals filing jointly – decreasing from 39.6 percent to 37 percent once income is over $600,000. Similarly, the corporate income tax rate was reduced to 21 percent from 35 percent — but you probably knew that already.
Pass-Through Entity Deduction
A new 20 percent deduction for taxpayers with income from S corporations, partnerships / LLCs, and sole proprietorships was created. The deduction is equal to the lesser of 20 percent of Qualified Business income (QBI) or a limitation based on the greater of the two tests below:
- 50 percent of the taxpayer’s pro-rata share of W-2 wages paid by the entity; or
- The sum of 25 percent of the W-2 wages with respect to the business, plus 2.5 percent of the basis of all qualified property.
The W-2 and/or asset tests above would not apply if the taxpayer’s taxable income was below the threshold amounts set forth in the Act ($315,000 for taxpayers filing a joint return; $157, 500 for single filers).
Limit on Deduction of Business Interest
For tax years beginning after December 31, 2017, there is a new limitation on the amount of interest expense that a taxpayer may be able to deduct. Essentially, a taxpayer’s interest expense will be limited to 30 percent of the entity’s adjusted taxable income (ATI). ATI is taxable income before deduction for interest expense, depreciation, amortization, or depletion, any net operating loss deduction, or interest income – any interest expense above that amount is “disallowed” as a deduction in the current year. This limit does not apply to taxpayers with average annual gross receipts for the three-year period ending with the prior tax year not in excess of $25 million.
Meals and Entertainment Expenses
For tax years beginning after December 31, 2017, the cost of business meals will still be deductible as they were before. But no deduction will be allowed for entertainment, amusement, or recreation activities. Accordingly, taxpayers will need to identify non-deductible entertainment activities, and will continue to identify business meal expenses subject to a 50 percent limitation. However, the 50 percent limitation on the deductibility of meals will now include meals provided via an in-house cafeteria or otherwise on the premises of the employer.
So, What’s Next for You?
You need to consider the changes outlined above along with a few not covered raise several questions, opportunities, and challenges to restaurant owners. Ask a qualified professional:
- How should I structure my business?
- Should I change my entity from a pass-through to a corporation or vice-versa?
- Should I immediately deduct all my fixed asset purchases prospectively (regardless of my entity type)?
Historically, choosing the type of entity to hold a restaurant was a straightforward-but-cumbersome process. Keep in mind that one should not rush to the conclusion that forming a C corporation is more beneficial than forming a pass-through entity.
Overall, there will be winners and losers under the Act, and it seems the advertised simplification of the new tax law may suffer from over-hype—at least for business owners. The complexity of these provisions should be carefully analyzed. The items outlined in this article present a useful starting point for restaurant owners and operators as they work to understand exactly how the Act impacts them.