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Hospitality - The American Taxpayer Relief Act and its Implications on You and Your Business


In his economic overview of the new tax provisions that Congress agreed on before the clock struck 12:00, Patrick J. O’Keefe, CohnReznick’s Director of Economic Research, says that the “American Tax Relief Act of 2012 (ATRA) adds some level of certainty to the tax code. Many of ATRA’s policy changes permanently extend what had been temporary exemptions or fixes.  Some of these changes accompany tax increases while others provide systemic relief. There is a real benefit from the longer-term stability implicit in these ‘permanent’ fixes: By giving businesses and households added confidence, it should bolster their willingness to invest and spend.”

As a business, you are likely wondering how the recently enacted ATRA provisions will specifically affect you. In fact, ATRA will have a significant impact on the restaurant businesses for tax planning purposes – and the window to act on these provisions may be limited. You may be interested in learning about the opportunities and challenges that lie ahead as a result of President Obama signing into law The American Taxpayer Relief Act of 2012 last week. Accordingly, the following discussion is aimed at helping you navigate the provisions included – and not included - in ATRA in order to gain a better understanding of the impact they may have on you and your business.

Incentives for Investment in Furniture, Fixtures and Equipment (FF&E):

  • The accelerated depreciation of certain qualifying capital expenditures was extended through December 31, 2013, with the requirement that such assets are placed in service before January 1, 2014. This provision includes 1) IRC Section 179 increased spending limits; 2) Bonus depreciation on 50% of qualified asset purchases; and 3) 15-year depreciation recovery period on certain real property such as for qualifying leasehold improvements. Please click here to read CohnReznick’s analysis of this ATRA provision and how you may benefit from its extension. Section 179 Expensing Thresholds:
    The act preserves the thresholds for Section 179 expense deduction at a maximum $500,000 deduction and a phase-out amount of $2,000,000 in assets for tax years 2012 and 2013. Eligible Section 179 property includes “off-the-shelf” software purchased for active use in a trade or business. The Act also allows taxpayers to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in 2012 and 2013.
  • 50% Bonus Depreciation:
    The Act extends the 50% expensing provision for qualified new property purchased and placed in service before January 1, 2014. The provision also allows taxpayers to elect to accelerate some AMT credits in lieu of this bonus depreciation.
  • 15-Year Life for Qualified Real Property:
    For qualified leasehold improvements, qualified restaurant property and qualified retail improvements placed in service after December 31, 2011 and before January 1, 2014, the Act provides a 15-year depreciation recovery period.
  • 7-Year Life for Motorsports Entertainment Complexes:
    The Act extends the 7-year depreciation recovery period for motorsports entertainment complexes. A motorsports entertainment complex is a racing track facility permanently situated on land that hosts at least one public motor vehicle racing event per year. This also includes support facilities such as food and beverage vending.


What does this mean? Taxpayers may want to consider building, expanding and investing in FF&E. For growing restaurant companies, the ability to take Section 179 expense deduction and bonus depreciation can have a significant effect on the company’s ability to accelerate tax deductions and free up cash flow necessary for expansion.

Incentives to Develop New Products and Technologies:

Research tax credits for qualified research activities were extended through the end of 2013.  The research tax credit is equal to 20% of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount; as an alternative, a simplified tax credit of 14% can be taken. With the ability to take the R&D tax credit, certain taxpayers will have an opportunity to amend their 2011 returns to claim expenditures incurred in 2012, and also claim the tax credit in 2012.  For Financial Statement purposes, companies most likely will not see the benefit in their 2012 financial statements of the retroactive reinstatement to 1/1/12 of the research and development credit in the fiscal cliff tax legislation. For calendar year companies, the benefit of the research and development tax credit for 2012 will not be realized until the first quarter of 2013. This is because, for accounting purposes the period of enactment, which was in 2013, instead of the period in which changes to the tax law are effective (retroactively 1/1/12), are generally controlling.

What does this mean? Operators who have test kitchens and have investment expenses for developing new technologies and procedures may qualify for this potentially significant incentive.

Incentive to Hire:

  • Hiring and Employment Credits
    The work opportunity tax credit (WOTC) has been extended through the end of 2013. This credit is available to employers who hire individuals who belong to a “targeted group.” The Act retroactively extends the starting work date for these individuals to January 1, 2012.
  • Empowerment Zones
    The Act extends the designation of certain economically depressed census tracts as Empowerment Zones through the end of 2013. Businesses and individual residents of Empowerment Zones are eligible for special tax incentives.


What does this mean? There are added incentives to hire individuals in “targeted groups,” such as qualified veterans and residents of Empowerment Zones. There is also an added incentive for potential expansion into an Empowerment Zone.

Incentive to be Community-Conscious:

Incentive to donate food inventory: The Act extends, through the end of 2013, the enhanced “above-basis” charitable contribution deduction for donations of food inventory to a charity that will use the donation to care for the ill, the needy or infants.

What does this mean? The enhanced charitable contribution deduction provides an even greater incentive to donate food inventory to charities in your area that support the less fortunate.

Other Changes that May Impact You and Your Business:

  • Changes in individual taxation:
    The Act extends and makes permanent the 10%, 15%, 25%, 28%, 33% and 35% individual income tax rates. The Act also adds a 39.6% bracket for individuals earning more than $400,000 and married joint filers with incomes greater than $450,000. The personal exemption phase-out for individuals now begins at $250,000 for individuals and $300,000 for married joint filers. The itemized deduction limitation for individuals now begins at $250,000 for single filers and $300,000 for married joint filers. These figures are indexed for inflation.
  • Capital gains/dividends:  
    For business owners and investors looking to exercise their exit strategy, the increase in capital gains tax rates may have a significant impact.  Due to increase significantly from 15% to the individual taxpayer’s regular tax rate for transactions occurring subsequent to the December 31, 2012, the capital gains tax rate increase was mitigated and was increased from 15% to 20%.  In addition, the 3.8% surtax on investment-type income and capital gains is in effect for transactions occurring after December 31, 2012.


What does this mean? These rates will impact the treatment and taxation of your business earnings. Advance tax planning is key to ensuring you are optimizing your tax position in light of the ATRA provisions.

Items Not Addressed in the Act:

The Act provides some incentives to grow business and hire new employees. However, the Act does not resolve questions related to the Affordable Care Act (ACA), the “debt ceiling,” or changes to Social Security and Medicare. These unanswered questions may have an impact on economic growth over the next few months that taxpayers should consider. This impact may include:

  • Significant increased labor cost related to implementation of the ACA
  • Potential inflation and increased commodity costs
  • Potential tightening of the credit market due to uncertainty regarding the debt ceiling
  • Federal budget uncertainties related to Social Security and Medicare costs


Contact:

For more information, please visit CohnReznick’s Hospitality Industry website and contact Gary Levy, CohnReznick Partner and Hospitality Industry Practice Leader, at 646-254-7403, or Marshall Varano, CohnReznick Principal, at 858-300-3424.

 


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters.

 

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