We are closing in on the end of the first year under President Trump’s signature piece of legislation, the Tax Cuts and Jobs Act(TCJA), which was signed into law in December of 2017. The TCJA is a sweeping piece of tax legislation that will likely affect virtually every industry,business and individual that incurs an obligation to pay income taxes. Since the TCJA made significant changes to tax rates, depreciation and capital asset write-off rules, its impact on the hospitality and restaurant industries will be significant. Let’s look at some of the most impactful provisions of that law on those industries:
Tax Rate Changes:
The TCJA reduced corporate tax rates to 21% for C corporations and introduced a 20% deduction for business owners of that are owned through a “pass through entity” (typically S corporations, LLC’s, partnerships and sole proprietorships). For those hotels and restaurants that enjoy sizable taxable earnings, the tax rate changes are a huge windfall.
Depreciation and Section 179 Expensing:
The TCJA created two ways of fully depreciating qualifying assets in the year of acquisition. Specifically, under the new BonusDepreciation rules, new or used qualifying tangible assets acquired and placed into service on or after September 28, 2017 through December 21, 2022, may qualify for up to 100% bonus depreciation. Starting in 2023 through 2026, the Bonus Depreciation benefit will be phased out. The TCJA also expanded the Section 179 expensing deduction beginning in 2018. Under the TCJA the new annual maximum 179 deduction is $1million. For those businesses in the hotel industry, the definition of qualifying Section 179 property now specifically includes lodging furniture, HVAC systems, roofing and fire protection and alarm systems.
Some of the Givebacks:
Of course, there were some givebacks that will affect a good many in the hotel and restaurant industries. For instance, deductions for amounts paid to executive officers generally can’t exceed $1 million per year.Additionally, under the TCJA a business interest expense deduction cannot exceed 30% of adjusted taxable income (for a business with $25 million or more in annual gross receipts). The TCJA also eliminates the deduction for meals and entertainment expenses. Finally, Section1031 “like kind” exchange benefits are no longer available for the personal property asset portion of a hotel or restaurant (only real property qualifies).This change could easily result in a significant current tax liability when considering the stand alone effect of recognizing a gain on the sale of personal property assets.
So, be sure that you are building the TCJA changes into your projections and forecasts. Of course,the tax law is complicated and consultation with a professional about your specific situation is always the proper course of action.
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