restaurant owner doing taxes in restaurant

If 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.  

restaurant manager conducting interview

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.

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For some restaurant owners who have been paying themselves a salary, it will make sense to do an analysis with their accountants to determine if they should take lower wages, says Burton. For individuals, the top tax rate dropped from 39.6 percent to 37 percent. Money left in the business will be taxed at 29.6 percent, he says. The 20 percent deduction in effect reduces the effective maximum tax rate on this business income from 40.8 percent to 29.6 percent — or 37 percent with the 20 percent deduction.

Of course you need to pay yourself reasonable compensation, he notes. “You also don’t want to leave yourself cash poor,” he adds.

More disposable income for restaurant-goers

The lowering of the top individual rate from 39.6 percent to 37 percent means that consumers will have a little more cash in their pockets. The tax law will offer bigger credits for household expenses such as childcare, with the Childcare Tax Credit doubling from $1,000 to $2,000 for each qualifying child. Meanwhile, the exemption for individuals will rise from $6,350 to $12,000, and for couples from $12,700 to $24,000. And fewer taxpayers will have to pay the much-maligned alternative minimum tax (AMT), now that the exemption is increasing to $70,300 for individual filers and to $109,400 for married couples.

Foodies are likely to spend some of that extra discretionary income in restaurants.

“People might tend to go out more,” says Dougherty. “From a big picture, that might have an impact on restaurants.”

Business people meeting in a restaurant

A wipeout of the entertainment tax deduction

In the past, entertainment such as golf outings and theater was 50 percent deductible as a business expense. That deduction is going away in 2018. But what is remaining is the 50 percent deduction for business meals—which could mean business professionals who want to show their clients some TLC will spend less time on the golf course and more breaking bread. “I think it’s going to drive big corporate outings away from events and drive them to restaurants to eat,” says Boccaccio.

Foodies are likely to spend some of that extra discretionary income in restaurants.

Survival of the Work Opportunity Tax Credit

The Work Opportunity Tax Credit is a federal tax credit for employers who hire people facing significant barriers to employment. They include unemployed and disabled veterans, recipients of food stamps, Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI), people living in empowerment zones or rural renewal counties, people referred by vocational rehabilitation programs, and the long-term unemployed.

This credit existed under the old tax law and made it into the final draft of the bill. The tax credit reduces employers’ taxes dollar for dollar, up to a maximum credit ranging from $1,200 to $9,600, depending on the employee hired. It is available for the first year the employees are hired and in some cases the first two years.

“This is good for restaurants,” says Boccaccio. “They are able to get a tax credit for each employee they hire. It will be a nice benefit to the restaurant as well as employees of the restaurant. The restaurant is incentivized to hire. That’s a good thing.”

NOTE: Upserve recently hosted a Webinar “What the New Tax Plan Means for Restaurateurs,” featuring insight from tax experts Ian Boccaccio with Ryan LLC, and Gregory Porcaro with Otrando, Porcaro & Associates. You can view a recording of the webinar below. 

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Elaine Pofeldt is an independent journalist who specializes in small business, entrepreneurship and careers. She is the author of The Million-Dollar, One-Person Business (Random House, Jan. 2, 2018), a look at how entrepreneurs are hitting seven-figure revenue in ultra-lean businesses. Her work has appeared in FORTUNE, Money, CNBC, Inc., Forbes, Crain’s New York Businessand many other business publications and she is a contributor to the Economist Intelligence Unit. (Photo credit: Jessica Evelynka Photography)