August 11, 2022

Legislation to change U.S. Tax Code would help restaurants expand, rebuild

Restoring depreciation, amortization to interest expense calculation gives operators financial flexibility.
The number of challenges restaurants are struggling with continues to grow. If it’s not inflation, supply chain disruptions, or the labor shortage, restaurants now are grappling with gaining access to capital and the cost of debt financing. 

A bipartisan manufacturing bill in Congress that aims to change the U.S. tax code could change that.

Introduced by Sen. Roy Blunt (R-MO) and Reps. Joseph Morelle (D-NY) and Adrian Smith (R-NE), the Permanently Preserving America’s Investment in Manufacturing Act (S. 1077/H.R. 5371) would restore depreciation and amortization to the calculation for capping business interest expenses. 

Depreciation is the reduction in value of an asset over time. Amortization is a process used to lower the value of a loan or asset over a specified period of time.  

Prior to 2022, the total amount of interest a business could deduct in a given year was limited to 30% of its “earnings before interest, taxes, depreciation, and amortization (EBITDA). 

Beginning this year however, the maximum interest deduction was scaled back when depreciation and amortization were no longer allowed to be factored into the calculation. In other words, what once was EBITDA became “earnings before interest and taxes” or EBIT.

That change had a disproportionate impact on restaurants, which were often required to take out loans to finance large capital investments in their facilities and equipment. In fact, the Coalition for America’s Interest released a report showing that businesses affected by the shift to the EBIT-based limitation, will on average see nearly a three-fold increase in incremental tax obligations.

Returning depreciation and amortization to the formula would allow for restaurant owners to invest money back into their businesses to expand operations, finance equipment and refurbishing expenses, and rebuild their workforce. 

It would also help the U.S. compete on the global stage. Due to the current EBIT standard, the U.S. is seen as an outlier among its peers in the Organisation for Economic Co-operation and Development (OECD).

The Association strongly supports the bill and will lead a webinar “Depreciation & Amortization: How Congress Could Help Restaurants Expand & Rebuild” on August 31 at 2 p.m. ET. Register here