How the new tax law impacts the hospitality industry
Published January 17, 2018
After much anticipation, speculation and debate, the “Tax Cuts and Jobs Act” (TCJA), was signed into law by President Trump on December 22, 2017. The TCJA brings with it many changes that will impact businesses and individuals across all industries and income tax brackets. Although most of the provisions of the new law take effect for tax years beginning in 2018, there are a few benefits that taxpayers may be able to take advantage of on their 2017 tax returns.
Provisions that prevailed
Two tax credits that are very beneficial to the hospitality industry were in jeopardy in the preliminary versions of the bill. The Work Opportunity Tax Credit (WOTC) was at risk of being repealed under the House version of the bill. Additionally, the House bill provided for the calculation of the FICA tip credit to be revised and the “frozen” minimum wage of $5.15 per hour would have been increased to current minimum wage rates. Given the nature of the industry, each of these provisions would have had a negative impact on owner/operators and investors. Neither of these proposed changes made it into the law.
Opportunities for 100% depreciation of property
The TCJA provides not one, but two opportunities for fully depreciating qualifying assets in the year of acquisition. depreciation has been expanded to include both new and used tangible property (under pre-TCJA only new property qualified) and taxpayers can depreciate 100% of the cost of tangible property purchased and placed in service on or after September 28, 2017 through December 31, 2022. Beginning in 2023, the bonus depreciation percentage will decrease each year and fully phase-out by the end of 2026.
In addition to the expansion of the bonus depreciation provisions, the TCJA also permanently expanded the Section 179 expensing deduction beginning in 2018. The maximum deduction for eligible property increased to $1 million with the phase-out threshold increasing to $2.5 million, both amounts will be indexed annually for inflation. For hoteliers, the definition of property eligible for Section 179 expensing has also been expanded to include certain tangible property used predominantly to furnish lodging or in connection with furnishing lodging.
These provisions, used in conjunction with one another, along with the repairs and maintenance regulations issued by the IRS in 2014, can provide very beneficial tax planning opportunities for the hospitality industry. Owners/investors should continue to evaluate their utilization of the de minimis safe harbor in addition to the retailer and restaurant remodel-refresh safe harbor.
Real property depreciation changes
Under the Section 179 provisions, the definition of eligible property has been expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems. In addition to the expansion of Section 179 to certain nonresidential real property, the TCJA provides for additional changes to many of the real property depreciation provisions that have been created under previous legislation. Included in these changes is the elimination of the qualified restaurant property, qualified leasehold improvements, and qualified retail improvements provisions. Under previous law certain restaurant buildings qualified for a 15-year depreciable life.
Under the TCJA, restaurant buildings will now have a 39-year depreciable life (the same as other commercial real estate). Interior restaurant improvements may still qualify for a 15-year depreciable life, and possibly 100% bonus depreciation and/or Section 179 expensing, under the qualified improvement property definition (pending a technical correction). Qualified improvement property is an interior improvement that is placed in service after the date that the building is initially placed in service. Qualified improvement property does not include any enlargements made to the building, elevators or escalators, or any improvement made to the interior structural framework of the building.
Reduced or eliminated employer deductions for business-related meals and entertainment
Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.
Under the new law, for amounts paid or incurred beginning in 2018, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.
Changes to some employee fringe benefits
The new law disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.
It also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes and van pooling), but those benefits are still tax-free to recipient employees.
We’re here to help
The TCJA is the largest overhaul of the tax code in more than 30 years, and we’ve covered only the highlights of how the legislation impacts the hospitality industry here. Under the TCJA, there are additional business and individual tax provisions that will impact owner/operators and investors. Please reach out to your MCM professional to discuss how the legislation may impact you.