f you run a restaurant or work in the restaurant industry, you may be wondering how the Republican tax plan, now signed into law by President Donald Trump, affects you. Now that some clarity is emerging on what the new provisions mean, Restaurant Insider spoke with tax experts and accountants to find out which aspects of the Tax Cuts and Job Act will affect the industry most. Here is a rundown of the changes in the law, most of which first take effect in 2018.
The dip in the corporate tax rate
For restaurants like McDonald’s or Chipotle that are large corporations, the permanent reduction in the corporate income tax rate from 35 percent to 21 percent is one of the most significant changes in the tax law—one that will free cash for reinvestment in growth. “It’s going to increase earnings for the public companies,” says Paul Dougherty, a tax partner at EisnerAmper, who is based in Iselin, New Jersey.
Repatriation of earnings from offshore operations
Restaurant companies that are multinationals will see another financial benefit from the law. It contains a reduced tax rate for foreign earnings and profits repatriated back to the United States at December 31, 2017 from foreign subsidiaries.
New rules on depreciation
As corporations redirect cash once spent on taxes to reinvestment, accountants expect them to take full advantage of bonus depreciation, which will allow them to take an immediate first-year deduction on eligible business purchases of capital assets.
“There are plenty of deductions that can be expedited for restaurants,” says Ian Boccaccio, global income tax practice leader at the global tax firm Ryan, who is based in Dallas. “It’s going to spur investment.”
There are plenty of deductions that can be expedited for restaurants.
One rule regarding depreciation took effect Sept. 27, 2017. Any organization that acquired equipment, furniture and fixtures would be allowed to fully deduct it for 2017. “That gives them the ability to reduce their income for that year,” says Ron Burton, tax principal of Grassi & Co.
Some of Boccaccio’s clients own hundreds of restaurants and invest in new property and equipment on an ongoing basis, running losses year over year. Under the changed tax law, he says, “They are able to claim a full deduction. It’s 50 percent of the cost in year one. For growing firms, it is possible they are not paying any federal tax and are qualifying for net operating loss deductions.”
Under the new rules, companies will be able to carry forward a net operating loss indefinitely. That’s a change from the old rules that said you could carry it forward 20 years, notes Boccaccio.
“That’s good news if you generate losses,” he says. “You can use the losses to offset future income indefinitely.”
Lower taxes for flow-through entities
The Tax Cuts and Jobs Act offers a provision for a deduction of up to 20 percent of pass-through trade or business income. Restaurant owners who have organized their businesses as an S corp or LLC can deduct from their business income the lesser of 20 percent of their qualified business income or 20 percent of tentative taxable income less the net capital gain. (There are limitations and a phase-out on the taxable income.)
“Going forward, starting January 1, 2018, only 80 percent will be picked up on their individual tax return,” says Burton.
