Tax reform at year one: Five issues for franchises to watch

Authored by: Dean Feenstra and Kevin Lang

The Tax Cuts and Jobs Act (TCJA) is considered the most comprehensive change in U.S. tax law since 1986, and the scope of the act has left officials scrambling to provide guidance on how many of the complex provisions will impact taxpayer returns. Here are a few areas of particular interest to franchises:   

1. Qualified business income deduction. This provision allows individuals to deduct up to 20 percent of “qualified business income” from pass-through entities. Limits may apply based on the taxable income, wages paid, and property held. Income from some professional services fields such as law, medical, accounting, consulting, and possibly franchise management services may not qualify for the deduction. 

2. Limits on business interest deductions. TCJA limited the deduction for net business interest expense at 30 percent of adjustable taxable income. Small businesses with average gross receipts of $25 million or less may be exempt, but aggregation rules could cause certain franchise groups to exceed the threshold. Businesses subject to the limitation can carry the unused loss forward indefinitely to future years. 

3. Depreciation changes. The law improved Section 168(k) bonus depreciation and Section 179 current-year expensing rules, but an oversight in the drafting of the legislation left some uncertainty about the application of the changes to restaurant and retail establishments. The provisions include: 
   1. A bonus depreciation allowance of 100 percent for newand used assets placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
   2. A decrease in the bonus percentage of 20 percent for each year after 2023, with the allowance disappearing completely after Dec. 31, 2026.
   3. Section 179 depreciation of assets placed in service during the year is increased up to $1 million annually. 

Congress is considering a technical correction for legislation that would extend this treatment to restaurant and retail leasehold improvements, but it’s uncertain if this correction will be passed prior to year end. 

4. Deductibility of meals and entertainment. TCJA significantly limited the deductibility of business meals and eliminated the deductibility of entertainment expenses. This could affect the franchise community, as the costs of franchisee conferences and employee-provided and business meals may become significantly less deductible. This tax law change not only will impact your tax situation but could impact operations as companies curtail the wining and dining of business contacts. 

5. Opportunity zone incentives. The law created tax-saving incentives for businesses to invest funds into developing real estate in certain distressed communities. The rules are complex, but taxpayers may be able to defer tax on eligible capital gains through this program. Companies looking to locate corporate headquarters or open new franchises should consider these incentives when reviewing sites. 

For more information about how these changes may affect the specific facts and circumstances of your franchise, be sure to consult your tax advisor. 

Authors:

Dean Feenstra, CPA, is Plante Moran’s tax leader for the service industry and franchise practice and specializes in tax planning, tax structuring, tax compliance, and general business consulting to help organizations succeed and flourish. 

Kevin Lang, CPA, CFE, is a partner in Plante Moran’s franchise practice, offering a thorough approach to tax planning and consulting, including assistance with state and local tax matters and succession planning. 

Learn more about Plante Moran’s franchise practice at plantemoran.com/franchise.