Tax Reform’s Impact on the Hospitality Industry
posted Feb 9, 2018 by Laura H. Yalanis, CPA, MST in the Restaurateur Blog
As we reported back in December, the original House and Senate bills proposed changes to a couple of credits that would have negatively impacted the restaurant industry. The original bill called for the elimination of the work opportunity tax credit immediately, rather than waiting until the current law expires on December 31, 2019. It also called for a reduction in the FICA Tip Credit benefit.
Fortunately, these provisions were dropped from the final bill that was signed into law.
Overview of the Tax Cuts and Jobs Act
The bill, among other things, reduced corporate tax rates for C corporations down to 21%. Owners of restaurants and hotels that are organized as pass-through entities (S Corporations, LLC's, partnerships and sole proprietorships) will enjoy a deduction of 20% of the pass-through income on their personal returns, provided certain wage thresholds are met. Personal income tax rates were reduced with rates now ranging from 10% to a high of 37%. Standard deductions increased. Personal exemptions were eliminated. Certain itemized deductions, including real estate taxes and state income taxes, were modified as well.
For a more comprehensive summary of the tax law changes, check out a recording of our recent webinar - “The Impact of Tax Reform on Businesses and Individuals.”
What’s at stake for the hospitality industry?
The repeal or rollback of several key credits and incentives would have put hotel owners and restaurateurs under pressure. Yes, tax rates were reduced, but without key credits, this benefit would have been outweighed. No doubt, the National Restaurant Association and State Associations lobbied hard to get those provisions stricken from the final bill. Their efforts on behalf of their constituents were successful!
FICA Credit- Did you read our recent blog on minimum wage increase?
The House and Senate had proposed a lower FICA credit. As restaurants with tipped employees know, this is one of the more valuable tax benefits currently available, so reducing it would have hurt the industry.
As referenced in our blog, under current law, the FICA credit is computed according to the 2007 federal minimum wage rate of $5.15 per hour. As a refresher, tips eligible for the FICA credit are those in excess of what’s needed for the server to make minimum wage.
If this provision had survived the final bill, the credit would no longer have been computed with the $5.15 per hour rate, but rather the current federal minimum wage (in effect each month during the tax year, currently at $7.25.) As a result, more tips would have been needed to bridge the gap between cash wages paid to tipped staff and the current minimum wage. Restaurants would have suffered with a lower FICA credit.
Fortunately, the provision did not survive the final bill. The credit calculation and the benefit remain unchanged.
The work opportunity tax credit (WOTC) was on the chopping block under the proposed legislation. But, this provision was also dropped from the final bill. Current law remains unchanged. Employers are still able to claim a federal income tax credit for a portion of salary and wages paid or incurred to eligible employees (unemployed veterans, TANF recipients, food stamp recipients) who begin work for the company before January 1, 2020.
It's important to note that this credit was first introduced as law in 1996 and has faced at least 9 expiration dates since. Each time the credit has been extended, sometimes retroactively. The last extension was with the PATH Act of 2015, which extended the term of the credit through December 31, 2019. It will be interesting to see if another extension is granted or if Congress will let it truly expire.
Section 179 Expensing and Bonus Depreciation
Starting in 2018, all businesses can expense up to $1,000,000 of the cost of qualifying property placed in service during the year. Make note: there are taxable income limitations and other nuances that apply, and as a result, in any given year not all businesses will be eligible to expense the full $1,000,000.
Bonus depreciation has also been expanded. Under the old law, bonus depreciation was set to drop to 40% for 2018 and 30% for 2019 and then expire after 2019. However, under the new law, bonus is set at 100% for assets placed in service from September 27, 2017 through December 31, 2023, then phased down through 2027. Also, the TCJA eliminates the limitation that allowed bonus depreciation on NEW assets only. Bonus is now allowed for both new and used purchases.
Restaurants and hotels can expect some challenges in 2018 and beyond, as this overhaul presents the most significant tax law changes in decades. If you own a restaurant or hotel, it would be wise to read up on how business will change in the coming years and plan accordingly. There are many positive changes for the industry, but it will depend on upper management to take full advantage of these benefits and keep business running smoothly.
We’re here to help. Contact us for more information.