The food and beverage industries face a number of advantages and disadvantages brought on by the Tax Cuts and Jobs Act (TCJA). Some of the most important changes impacting restaurants include the lower corporate tax rate, depreciation changes and new pass-through rules.
Corporate Tax Rate
Restaurants structured as a C Corporation may see a dramatic reduction in tax rate. Prior to the TCJA, corporate tax rates varied from 15% to 35%. Beginning January 1, 2018, the C Corporation tax rate is a flat 21%. This change will have a positive impact on all C Corporations that have had taxable income above $50,000. Those C Corporations that had taxable income below $50,000 will actually see an increased tax rate from 15% to 21%.
Any restaurants that are structured as pass-through entities may see a benefit from the lowering of the individual tax rate reduction. In 2018, the highest individual tax rate was lowered from 39.6% to 37%. The total income that places an individual in the top tax bracket was also increased resulting in a further tax benefit.
Qualified Business Deduction
All restaurants structured as an S Corporation or Partnership will also see some positive changes regarding tax rates. Pass-through entities can now claim a new 20% Qualified Business Income Deduction. This deduction from taxable income decreases the maximum marginal tax rate on pass-through income from 37% to 29.6%.
Net Operating Losses
As of December 31, 2017, net operating loss deductions are limited to 80% of taxable income. This calculation is determined without regard to the deduction. These losses arising after December 31, 2017 may also only be carried forward. This 80% limitation may put businesses in a situation where they have substantial losses one year and end up with taxable income in the following year.
Business losses at the individual level are now only permitted in the current year to the extent that they do not exceed the following:
- Taxpayer’s gross income
- $500,000 for joint filers or $250,000 for other taxpayers
Bonus Depreciation and Section 179
The restaurant industry will also see benefits from changes in depreciation rules. The maximum bonus depreciation expense increased from 50% to 100% on certain capital expenditures. This means that certain fixed assets, including the purchase of used furniture, fixtures, and equipment, purchased after September 27, 2017 can be fully deducted in the current year.
Meals and Entertainment Expense
Beginning in 2018, entertainment expenses are no longer deductible unless already included in employees’ income. This pertains to all expenses including recreation activities, facilities, or any membership dues related to such activities. Any food or beverage expenses associated with operating a trade or business will still receive a 50% deduction.
The House version of this bill initially included an increase in the per hour minimum wage used for the FICA Tip Credit. The final bill elected to continue to use the 2007 minimum wage of $5.15 for tax years beginning on January 1, 2018.
The Tax Cuts and Jobs Act has created many new planning points for restaurants. Contact an Anders advisor to determine the most advantageous tax planning opportunities for your restaurant. Learn more about Anders Lodging, Food and Beverage services.All Insights