The enactment of the Tax Cuts & Jobs Act (TCJA) contains many provisions that significantly change the tax landscape for both individuals and businesses. Here are four key changes that will have a significant impact on restaurant industry businesses (and their owners) and three strategies to consider:
1. Overal Reduction in Tax Rates
Restaurants that are structured as pass-through entities may benefit from the lowering of the individual tax rates. The highest individual tax rate was lowered from 39.6% to 37%. In addition, the total income amount that results in the application of the highest marginal tax rate was increased.
Effective January 1, 2018, restaurants operating as C-Corporations will now be taxed at a flat 21% federal income tax rate. This is a substantial decrease from the prior law which provided for a maximum rate of 35%. The tax rate applicable to qualified dividend distributions was unchanged.
2. Bonus Depreciation and Increased Section 179 Expense
The previous bonus depreciation requirement for property to be “original use” has been eliminated. As a result, bonus depreciation is available for both new and used property (applicable to property acquired after September 27, 2017). In addition, the bonus depreciation percentage has been increased to 100% for acquisitions occurring between September 28, 2017, and December 31, 2022 (i.e. 100% of the cost of qualified property can be expensed in the year of acquisition).
For property placed in service after December 31, 2017, the TCJA increases the Section 179 expense deduction to $1MM with the start of the phase-out threshold increasing to $2.5MM (complete phase-out of deduction occurs at $3.5MM of property additions). In addition, certain improvements to non-residential real property (roofs, HVAC, fire protection, security systems, etc.) are now eligible for deduction under Section 179.
These two changes should have a positive impact on the after-tax cash flow of those operating in the restaurant industry.
3. 20% Deduction for Qualified Business Income
A significant new provision in the TCJA is the creation of a 20% deduction for Qualified Business Income for individuals and trusts/estates that own pass-through businesses, which include sole proprietorships, LLCs, S-Corporations and disregarded entities. In general, the 20% deduction is based on the lower of the owner’s taxable income or allocable share of “Qualified Business Income.” There are limitations on the deduction based upon the amount of employee wages paid by the business.
4. Accounting for Inventory
In general, businesses are required to capitalize inventory when the production or sales of such inventory is a material income-producing factor. Currently, an average gross- receipts-based exemption is provided, which exempts businesses from maintaining inventory when its average gross receipts for the prior three tax-years is below a specified amount. Such amount has historically been either $1M or $10MM (varies based on the type of entity). The TCJA provides for an increase of such amount to $25MM regardless of entity type. This change will exempt many restaurants from the requirement to maintain inventories for income tax purposes.
In addition to the opportunities under the new tax law, here are three strategies that are often beneficial to those operating the restaurant industry:
1. Federal Tax Credits
- FICA Tip Credit – Credit provided to employers for their share of payroll taxes paid on the Tip Income of its employees.
- Work Opportunity Tax Credit – Credit provided to employers for the hiring of individuals from target groups (i.e. veterans, SNAP recipients, etc.).
2. Georgia State Credits
- Retraining Tax Credit – Credit provided to employers related to costs incurred for the training of employees on new equipment and technology.
- Jobs Tax Credit – Credit provided for the creation of full-time jobs in designated geographic areas.
3. Cost Segregation Studies
- Restaurants that have invested a substantial amount of capital in buildings and related improvements may benefit from a cost segregation study to optimize the classification of such costs and acceleration of depreciation deductions.
To learn more about how to take advantage of these strategies, please contact your Moore Colson Partner.