The Tax Cuts and Jobs Act has yielded just as many questions as answers since its inception. Restaurants structured as C-Corporations enjoy a 21% tax rate, while restaurants operating as “flow-through” entities enjoy the benefit of the 20% deduction of Qualified Business Income. Many restaurants began paying reduced compensation to their owners (S-Corporations) or reduced guaranteed payments (LLCs). They have enjoyed employment tax savings, a higher QBI deduction and reduced federal income tax liabilities. Despite favorable results, uncertainty still exists regarding bonus depreciation for Qualified Improvement Property. Corrective legislation could incentivize restaurants to initiate store remodeling in 2019 that has been placed on hold due to the inadvertent drafting error specifying that these improvements be depreciated over 39 years, rather than the intended 15 years.
In addition, owners should be asking themselves the following questions:
Q. What tax planning ideas are available to lower my 2019 tax liability?
A. Taxpayers that meet the $25 million gross-receipts test are not required to account for inventories under Code Sec. 471 but rather may use an accounting method that either (1) treats inventories as nonincidental materials and supplies or (2) conforms to their financial accounting treatment. If you have multiple locations, this may be a significant tax planning tool that has a permanent impact. Proprietary restaurant chains can place the intellectual property in a separate entity, allowing for a reasonable charge for royalty payments from the related entities.
Q. What type of tax credits are available for restaurant owners?
A. The Work Opportunity Tax Credit (WOTC) is a federal tax credit available for employers hiring individuals from one or more of the targeted groups of employees. The credit is 25% of qualified first-year wages (up to $6,000) for those employed at least 120 hours but fewer than 400 hours, and 40% for those employed 400 hours or more.
Most restaurants anticipate a positive impact on their overall tax position, thanks largely to enhanced bonus depreciation and the Qualified Business Deduction. Those savings are more than likely being reinvested back into the business to help with rising labor costs, to attract and retain talent and to expand their delivery and technological capabilities.
The restaurant team at RJI CPAs is available to help you navigate and implement tax planning techniques for your business.
Fernando Jimenez, CPA, MST, CEO
Fernando Jimenez is the Chief Executive Officer and tax partner of RJI CPAs. Fernando has experience in corporate re-organizations, buy/sell transactions, representation before the IRS and state agencies, succession and operations planning, and transactional analysis. He can be reached at 949.852.1600 or fjimenez@rjicpas.com.
About RJI CPAs
Established in 1980, RJI specializes in audit, accounting, corporate and international tax issues for publicly traded and privately held companies. RJI is PCAOB
registered and the Southern California member firm of DFK International, the 7th largest global accounting network and RJI CPAs was recently named, “Inside Public Accountingʼs” Top 400 Firm in the U.S.
