Restaurateurs are always on the lookout for extra dollars and savings they can use to improve their businesses, expand their operations and invest in employees.

The federal tax reform law of 2017 offers new opportunities for restaurateurs to save, according to Association partner RSM. With the right planning, operators can take advantage of key provisions of the Tax Cuts and Jobs Act (TCJA), says RSM Tax Partner Matt Talcoff.

Talcoff offers top takeaways as operators prepare to file their 2018 tax returns and budget their 2019 revenues and expenses.

  • What type of entity should I be? Think it through.

    Talcoff says restaurant operators frequently ask him what type of tax entity they should be. The TCJA reduced the tax rate for C corporations to 21 percent for tax years starting after Dec. 31, 2017, down from 35 percent. That’s a major tax reduction, but doesn’t necessarily mean all businesses should become C corporations, says Talcoff. 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, the 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.

Capital spending: 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 tax 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” from the federal bonus depreciation rule and require depreciation under the old rules. 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 expands 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 tax law preserved some key tax credits for restaurants, including the Work Opportunity Tax Credit, a tax benefit for employers who hire and retain employees who typically face barriers to employment. 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 already weighing some corrections to the TCJA. These include a technical fix supported by the 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, Congress failed to assign the 15-year depreciation period to the QIP category. In addition to Congress's changes, stay tuned to more details from the Treasury Department 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 premises.

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

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