Turning Tax Reform on High Heat

As Congress turns its attention to tax reform, it’s clear they’re taking legislation off the backburner and turning up the heat. Though it looks like an overhaul may be starting to simmer, don’t make any major tax planning changes until a plan is fully baked.

Per President Trump’s tax reform framework revealed in April (see BDO’s recap here), the White House would lower the business tax rate, focus on international tax reform and eliminate tax breaks for special interests. Though the lower rate would be good for business overall, the lost income would need to be made up to achieve revenue-neutral reform. Where would that money come from?

Slashing the corporate tax rate from 35 to 15 or 20 percent may mean a reduced federal tax burden, but it’s possible that some restaurant industry tax credits could end up on the chopping block. Incentives like the Credit for Social Security & Medicare Taxes (FICA Tip Credit) or the Work Opportunity Tax Credit (WOTC) benefit the restaurant industry, and because of the relatively limited benefit to other industry sectors, they could be the first to go. In fact, the FICA Tip Credit was almost scrapped during the Obama era. Of course, a lower rate generally sounds attractive, but some restaurateurs may rely on these credits while doing fiscal year tax planning.

As reform happens at the federal level, the states will most likely follow. Assuming less federal funding, the states will likely hike up their tax rates, comprising a much higher percentage of restaurant companies’ overall tax liability. Though unlikely, should the business rate go as low as 15-20 percent, restaurants in states like California and New York will see their state tax liabilities become a significant portion of their overall tax liability.

When considering tax reform in consumer-facing industries like restaurants, it’s important to keep the customer in mind and ask: Will reduced tax rates and a simpler system create more expendable dollars for the consumer and help the restaurant industry from a sales tax rate perspective? Ultimately, the philosophy behind big tax cuts is to put more money in the taxpayer’s hand so they can go out and spend it.

For now, a firm tax reform plan remains to be seen, though with the collapse of the healthcare bill, it may rise to the top of the White House’s agenda. As legislators gear up to set an overhaul in motion, make sure you have a complete view of your business’s total tax liability—including the broader business impact on company financials and strategic decision-making—so you can respond and adapt quickly if and when tax reform is enacted.

For more information on how tax reform may impact restaurants, contact Adam Berebitsky at [email protected]. Be sure to keep up with the latest on tax reform and restaurant by subscribing to our blog on the Selections homepage here, and follow us on Twitter at @BDORestaurant.