Maximizing Tax Deductions Under the New Tax Law

This article appears in the May 2018 issue of Entrepreneurial Chef Magazine. 

The new tax law is great news for the foodservice industry. Chefs who own pass-through entities may deduct up to 20 percent of their business income, subject to certain limits. Also, there are increased deductions for capital expenditures will shield income for food business owners who make capital investments and improvements in properties.

The new pass-through deduction will benefit food business owners holding title through partnerships, LLCs, and S-Corps generating “qualified business income.” Businesses will receive a 20 percent deduction on net income. While the pass-through provision is complex, there are many tax saving opportunities available to owners who plan carefully.

For example, if you own a restaurant, which grosses $5 million and operates as an S-corporation, with wages of $2 million and other expenses of $1 million, your business income eligible for the deduction is $2 million. The deduction is $400,000, which is the lesser of 20% of the “qualified business income” or $1 million, which is 50% of the wages. If instead, you used contract labor of $1.5 million and paid wages of $500,00 your deduction would be limited to $250,000 (50% of wages).

The new tax law will allow many owners to fully expense qualified new and used property, with a recovery period of 20 years or less. This is a major tax benefit for the restaurant industry. Under the previous tax rules, the bonus depreciation deduction was limited to 50% of the eligible new property. The new tax law allows bonus depreciation and immediate deduction of 100% of eligible property placed-in-service after September 27, 2017, and before January 1, 2023. The inclusion of used property is a significant change from previous bonus depreciation rules. These amounts are indexed for inflation for taxable years beginning after 2018. The old category of “qualified restaurant property” has been eliminated. Instead, depreciable restaurant improvements are now in the more general category of “qualified improvement property.” Although left out of the first draft of the new law because of a drafting error, it is anticipated that all qualified improvement property will be eligible for bonus depreciation treatment as long as the property has a life of 20 years or less.

The depreciation rules have expanded to include in the definition of section 179 property depreciable tangible personal property improvements made to the nonresidential real property, as long as the improvements are placed in service after the date the building was first placed in service. The deductible amount that can be expensed has doubled, from $500 thousand to $1million. Owners can take advantage of Section 179 for fire systems, security systems, roofs, and HVACs, when 100% first-year bonus depreciation isn’t available.

Cost segregation remains very important for restaurants and food businesses, especially for assets placed in service before the new bonus depreciation rules became effective in September 2017. Cost segregation allows for recharacterization of certain property, such as counters, booths, and electrical wiring as having a short recovery period property, typically 5 years.

About the Author

Steve Moskowitz is a top tax attorney with 30 years of helping businesses, entrepreneurs and individuals navigate complex tax code. Steve founded Moskowitz LLP, a tax law firm offering clients a full suite of services. Having taught law, tax, and accounting, Steve takes confusion and anxiety out of tax planning, preparation and resolution.