Summary tax reform applicable changes
The Tax Cuts and Jobs Act (TCJA) brought significant changes for many businesses and individuals, including an overall cut in tax rates. Those in the hospitality industry have been generally optimistic about the changes, expecting both an increase in consumer spending and the ability to invest in people, technology, development and other improvements in their businesses because of anticipated lower tax liability. Specific provisions in the tax law affect the hospitality industry more than others. To help hospitality businesses understand these provisions, we have provided a summary of following five applicable changes:
- Pass-Through Entity Deduction
- Bonus Depreciation & Section 179 Expensing
- Meals, Entertainment and Fringe Benefits
- Interest Deduction Limitations
- Excess Business Losses
1. Pass-Through Entity Deduction
Under the tax reform bill, C Corporations benefitted largely from the reduction of the corporate tax rate. The Qualified Business Deductions, i.e. 20% deduction, was passed to create more incentive for pass-through entities. Qualifying pass-through entities will receive a 20% deduction on pass-through income for tax years beginning after 12/31/17 and expiring in 2025 (with potential caps for some). The deduction potentially benefits hospitality industry business owners with the exception of management companies providing professional service and consulting to businesses.
2. Bonus Depreciation & Section 179 Expensing
Property and equipment play a major role in a hospitality business’ operations. Depreciation and immediate expensing options help businesses utilize property and equipment to reduce taxable income. The tax reform bill helped refine the rules for immediate expensing, referred to as “Bonus Depreciation” and “Section 179 Expensing”.
- Under the updated bonus depreciation rules, assets placed in service after September 27, 2017 have no limit to the amount that can be expensed. Prior to the new law, Bonus Depreciation was limited to 50 percent of the cost of new property. Now bonus depreciation can be used on new and used purchases. The new law eliminates the separate categories of qualified leasehold improvement property, qualified restaurant property and retail improvement property and consolidates into one category: qualified improvement property (QIP). This has important consequences to real property placed in service after 12/31/2017 and whether 100% bonus depreciation applies. The ability to expense 100% of eligible property and equipment creates a tax benefit that is likely to encourage more capital spending, potentially enabling more remodels in the hospitality industry. The amount allowed to be expensed is set be phased out over the next couple of years.
|Placed in Service Year||Allowable Expensing|
|After September 27, 2017 – Dec. 31, 2022||100%|
section 179 expensing rules eased restrictions that were imposed on the special
deduction. The new law increases the phase-out limits significantly and
includes costs of property placed in service that are incurred to improve a
structure, such as:
- Heating, ventilation, and air-conditioning property
- Fire protection and alarm systems
- Security systems
Special deduction for most types of real estate components, except for those mention above, are still disallowed. Additionally, you still must have taxable income in order to qualify for the Section 179 expensing. The following chart illustrates the maximum section 179 expensing allowed and the beginning deduction phase-out threshold
|Tax Year||Maximum Deduction |
|Beginning Deduction |
|2017 (old law)||$510,000||$2,030,00|
|2018 (new law)||$1,000,000||$2,500,000|
|2019+||$1,000,000 (Plus Inflation)||$2,500,000 (Plus Inflation)|
3. Business Meals, Entertainment & Employee Fringe Benefits
The TCJA removes all deductions for entertainment, amusement and recreation, and for membership dues at any club organized for business, pleasure, recreation or another social purpose that are paid or incurred after December 31, 2017. Furthermore, the law limits the deductibility of the costs of food and beverages provided to employees through eating facilities, as well as de minimis food and beverages at the workplace that are employer-provided. Under previous rules, companies could deduct 50% for a variety of expenses, such as client meals, event tickets, charitable event tickets and membership fees. Disallowed entertainment and meal deductions apply even for expenses directly related to the active conduct of a taxpayer’s trade or business. However, there are exceptions to this limitation that allow for certain employee events to be deductible.
Additionally, the law disallows employer deduction for the cost of providing commuting transportation to employees, except if the transportation was necessary for the employee’s safety. The TCJA law also eliminated employer deductions for qualified employee transportation fringe benefits, such as parking allowances and mass transit passes. This will cause businesses to decide if they will continue to pay for nondeductible fringe benefits, or instead pass the tax burden to their employees by including the amount in taxable wages.
4. Interest Deduction Limitations
The deduction for net interest expenses incurred by a business is now be limited to 30% of its adjusted taxable income – or earnings before interest, taxes, depreciation and amortization. Businesses with average annual gross receipts of $25 million or less are exempt from the limit. This new rule will generally impact highly indebted companies the most.
5. Excess Business Losses
For tax years beginning after December 31, 2017 and before 2026, excess business loss of a taxpayer other than a C corporation is limited. Net business loss of $250,000 (or $500,000 in the case of a joint return) will not be deductible in the current year. However, an excess business loss is treated as part of the taxpayer’s net operating loss and can be carried forward to subsequent years.
The tax reform bill is impacting the hospitality industry in several ways, many of which are positive, including projected higher spending on travel and leisure activities due to a lower corporate tax rate, lower rate for pass-through entities and expanded expensing rules. Yet some changes may have unforeseen consequences. If you have questions about these changes or tax planning strategies in light of the reform, or need assistance with an audit, tax or accounting issue, Smith Schafer can help.