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National Restaurant Association - What the 2017 tax law means for your restaurant business

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What the 2017 tax law means for your restaurant business

Looking for savings you can use to reinvest in your business and your employees?

The tax law of 2017 -- officially, the Tax Cuts and Jobs Act -- offers opportunities for restaurateurs to save, according to National Restaurant Association partner RSM. Operators can take advantage of TCJA's provisions with the right planning, says RSM Tax Partner Matt Talcoff.

Talcoff's takeaways as businesses prepare for tax season: :

  • Think through what type of entity you should be. Talcoff says one of the questions he hears most often from restaurants is about the type of tax entity they should be. The TCJA reduced the tax rate for C corporations from 35 percent to 21 percent for tax years starting after Dec. 31, 2017. That’s a major reduction but doesn’t necessarily mean all businesses should become C corporations: Talcoff says you’ll need to figure out how provisions of the law work together and also consider your longer-term business and personal goals.

    A business organized as a sole proprietorship or a pass-through entity such as an S corporation, LLC or partnership currently pays taxes on business income at individual rates. Before you jump into a decision about converting to a C corporation, Talcoff advises you to consider another TCJA provision that potentially allows taxpayers who pay at individual rates to deduct 20 percent of qualifying business income before calculating your federal tax bill. If you pay taxes at the new 37 percent individual rate and have qualifying business income, this new pass-through deduction could drop your effective federal tax rate to about 29.6 percent.

    Long-term plans are also important, says Talcoff. If you expect to hold on to your restaurant business for a long time or keep it in the family, it may make sense to convert to a C corporation and use the tax cash-flow savings for the business. But if you’re thinking about going into a joint venture or selling to a financial or strategic buyer over the next few years, be aware that you could create the potential for a double tax if you sell your assets as a C corporation or need to take distributions from the company.
     
  • Model your equipment-purchase deductions. If you buy equipment such as booths, chairs or kitchen equipment, the TCJA includes a bonus depreciation provision that allows you to immediately write off 100 percent of the cost of equipment acquired and placed into service after Sept. 27, 2017. It’s a generous benefit, and for the first time available for used as well as new equipment. But Talcoff cautions operators to investigate all options before proceeding. He notes that many states will “decouple” their rules from the new federal bonus-depreciation rule and require depreciation under the previous federal rules.. Talcoff's advice: Ask your tax advisor to help you model how to deduct your asset purchases. You may find you’re better off balancing expensing between the bonus-depreciation provision and the Internal Revenue Code’s Section 179 expensing, which also expanded under the TCJA. Unlike the bonus-depreciation provisions, most states follow the federal government’s Section 179 expensing rules.
     
  • Take advantage of tax credits and deductions. The 2017 tax law preserved some key tax credits for restaurants, including the Work Opportunity Tax Credit, for employers who hire and retain employees who typically face barriers to employment. The law also retained: the FICA tax reimbursement credit for certain employer taxes paid on employee tips, and an enhanced deduction for charitable donations of food inventory.
     
  • Stay tuned for further changes. Congress is weighing some corrections to the TCJA. These include a technical fix supported by the National Restaurant Association to clarify that restaurants and retailers should be able to depreciate construction and building improvement costs (called “qualified improvement property”) over 15 years rather than 39 years. Due to a drafting error in 2017, Congress failed to assign the 15-year depreciation period to the QIP category. The Treasury Department also continues to release details to explain the law. In October, for example, the agency offered preliminary guidance to reaffirm that business taxpayers can continue to deduct 50 percent of their spending on business meals. The Treasury Department has also promised guidance on the tax treatment of meals that employers furnish to employees on the business's premises.

RSM offers restaurant resources to guide your planning, including “Tax reform and the restaurant sector: Key considerations.”
 

Sponsored content provided by RSM, a National Restaurant Association partner. RSM provides audit, tax and consulting services to middle-market companies.

More insights from RSM:

A tip on tips: Remember the FICA reimbursement credit


You may be eligible to claim a credit for a portion of taxes paid on employees' tips, RSM advises.

5 reasons to use the Work Opportunity Tax Credit
If you haven't used the WOTC, now is a good time to take a look, says RSM.

Taxpayers can deduct 50 percent of their business meal spending, IRS confirms
6 questions about business-meal spending.

Restaurants gear up for sales-tax changes in wake of Supreme Court decision
Sales-tax compliance could get complicated for restaurants that file in multiple jurisdictions.

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