While the federal government's Emergency Economic Stabilization Act of 2008—better known as the “bailout”—has drawn a lot of controversy, the National Restaurant Association (NRA) lauds at least one measure included in the law as a “major victory” for the industry.
Signed into law on October 3, the plan designed to stabilize the economy also includes a provision to reduce the depreciation schedule for improvements made to restaurant buildings in 2008 and 2009 and for new restaurant construction in 2009.
“We scored a major win in terms of restaurant depreciation,” says Michelle Reinke, director of legislative affairs for the NRA. “It's long been a top tax priority for the industry.”
While other businesses, including amusement parks and convenience stores, have had a 15-year depreciation schedule for some time, it was previously set at 39.5 years for restaurants. With the new, accelerated schedule, a restaurant could save around $7,000 per year in taxes on a $700,000 construction project, according to the NRA.
“The shorter the depreciation, the more you're able to write off for tax purposes each year,” explains Darrell Johnson, CEO of FranData, a provider of custom research for the franchise industry.
That frees up cash that can be used for other priorities.
“With the 15-year schedule, the money [restaurateurs] are saving on taxes can be put back into the business to expand or hire more people,” Reinke says.
Though the change is only applicable for improvements made in 2008 and 2009 and new construction in 2009, Reinke says it is still a significant step forward.
“Now that it's in the tax code we can work to extend it and work to make it permanent,” she says.
More Tax Relief
The reduced depreciation schedule was not included in the first version of the bailout bill, which failed to pass in the House of Representatives on September 29. It, along with other tax relief measures, was added to a second version drawn up in the Senate to help sway opponents of the legislation.
“It just came down to a matter of politics,” explains Alisa Harrison, vice president of communications and marketing for the International Franchise Association. “The bailout failed once, and negotiators were trying to look for things that could be added to make [opponents] feel a little better about voting yes. That's the way a lot of our laws get passed; when there's a close vote, they end up doing some horse-trading. This was one example of that.”
Dubbed “sweeteners,” the measures that made their way into the final version of the bill also include other sources of potential tax relief for restaurant owners.
For starters, the Work Opportunity Tax Credit, which provides a federal income tax credit of up to $2,400 per year per employee to employers who hire workers from certain disadvantaged groups, has been extended for two years—to August 2009—for those affected by Hurricane Katrina.
“Because they're getting a tax credit, it makes hiring that worker more cost effective,” Johnson says. “The intent is to create an incentive … for employers to hire more employees.”
The law also allows for enhanced charitable deduction for food inventory and includes a patch providing Alternative Minimum Tax relief for 2008, increasing exemption amounts to $46,200 for individuals and $69,950 for married couples filing jointly.
In order for restaurateurs to get the most out of these tax breaks, however, it's important to work with an accountant.
“Almost all of these things are directly influencing the accounting side,” Johnson says. “In order to take advantage of them, you need to have the advice of tax counsel. They won't fall in your lap, you need to take advantage of them.”
Freeing up Credit
Of more immediate benefit to restaurants are the basics of the plan, which allows the U.S. Treasury to buy up $700 billion in troubled assets from banks to help thaw frozen credit markets.
“What this [law] is going to do is help free up credit,” Harrison says. “It will ensure that there is affordable and available credit.”
That, Reinke says, should help restaurants get on with business.
“This means people are able to make payroll and get credit to be able to expand and continue the normal functions of business,” she says.