August 01, 2023

Restaurant operators need Congress to Put the ‘DA’ back in ‘EBITDA’

Calculator, two pens, and a sheet of paper

Restaurant operators face many challenges today, from labor shortages to supply chain disruptions. In this tumultuous business landscape, a recent change to the nation’s tax law is creating serious financial threats for restaurant operators. That’s why the Association is supporting several steps Congress can take to change the law that’s poised to push family restaurant businesses off a tax cliff.

The restaurant business is unique in that most restaurants see profit margins of 3-5% before tax. These thin margins are further stressed by today’s inflationary environment, where food, labor, and operating costs are unusually high. In addition, restaurant operators must regularly renovate and remodel their dining rooms, kitchens, and buildings to remain competitive. Most operators plan extensive—and expensive—updates every five to ten years due to the high traffic in dining areas and the heavy use of kitchen equipment.

In 2017, Congress limited the net interest a business could deduct to 30 percent of its adjusted taxable income. From 2018 to 2021, adjusted taxable income was calculated as earnings before interest, taxes, depreciation, and amortization (EBITDA). Starting in 2022, adjusted taxable income became calculated as earnings before interest and taxes (EBIT).

The change from EBITDA to EBIT may seem small, but as Carol Fortney, CFO of Fortney Hospitality Group based in Wisconsin, says, “a small tax code change is having such a huge impact on so many business owners.”

If a restaurant operator takes out a loan to pay for necessary restaurant upgrades, part of the interest on those loans can be deducted from a business’s income for tax purposes because they are an investment. However, the change from EBITDA to EBIT, which went into effect in 2022, limits the amount of interest that can be deducted. This drastically changes a restaurant operator’s tax liability.

As a result, this new limit is pushing thousands of local and regional chains over a tax cliff, leaving them with tax bills far higher than before 2022. For restaurant operators, who are already operating on thin margins, not being able to deduct these expenses while facing newly exorbitant tax bills is making it even harder for them to stay in business.

For family business restaurant operators like the Fortney Family, these changes have been upsetting. “Prior to 2018, there was no limit on the amount of interest a business like ours could deduct. 2018 was the first time our family-owned business could not deduct all the interest we paid to our lender and our taxes increased significantly. Then last year, depreciation and amortization were removed from the equation and the tax liability for many restaurants increased again!

Fortney says, “this couldn’t have happened at a worse time as the last few years have been the most difficult in Fortney Hospitality Group’s history,” and restaurant operators nationwide agree.

Many restaurant operators are saddled with more debt than ever – taken out just to keep paying the bills during the pandemic. As interest rates have increased, the interest charged on many of these loans has also gone up considerably. This makes the new interest deduction limitation all the more painful.

Putting the DA back in EBITDA would mean that more restaurant operators can continue serving as an economic growth engine in their community. That’s why the National Restaurant Association is championing legislation in the U.S. House and Senate to help business owners like Carol Forney and restaurant operators nationwide.

In the Senate, senators Shelley Moore Capito (R-W.Va.) and Kyrsten Sinema (I-AZ) introduced the American Investment in Manufacturing (AIM) Act, S. 1232, which would permanently restore interest on business debt deduction, effectively putting the DA back in EBITDA. In the House, the Committee on Ways and Means recently advanced the Build It in America Act, H.R. 3938, which includes a four-year restoration of the deduction.