How 'fiscal cliff' deal impacts small restaurateurs, franchisees

While the restaurant industry breathed a collective sigh of relief when the White House and Congress just narrowly avoided plunging the country over the "fiscal cliff" in December, not everyone is thrilled with all aspects of the deal.
“We’re pleased to see a deal reached on the fiscal cliff,” said Rob Green, president of the National Council of Chain Restaurants. “But we’re not out of the woods yet.”

While the Taxpayer Relief Act of 2012 ensured that about 98 percent of Americans and 97 percent of small businesses would not see their income taxes rise in 2013, some restaurateurs will not be so fortunate.

Small business operators who make more than $450,000 annually and file federal tax returns for their businesses as pass-through entities will see their tax rate rise by almost 5 percent to 39.6 percent, according to Jay B. Perron, vice president of government relations and public policy for the International Franchise Association.

Filing as a pass-through entity means that owners are taxed individually on the income from their business rather than on the business itself, thereby avoiding double taxation. Partnerships, sole proprietorships, LLCs — or limited liability corporations — and S corporations are categorized as pass-through entities for federal income tax purposes.

As a result, many who will see a rise in their federal income tax rate would like to see Washington address the issue of comprehensive tax reform. That would bring some relief to small restaurant operators and franchisees, which often file as pass-through entities, according to Perron.

Steve Caldeira, president and chief executive of the IFA, said the Washington-based associationwould continue to push for comprehensive tax reform for both corporate and individual rates in 2013.

“The U.S. has the highest corporate tax rate in the world,” he said. “We need to be more competitive in the global economy, but it can't come on the backs of the small business community. Small business creates nearly two-thirds of the net new jobs in the U.S., and that's why we need to be focused on extending income tax rates for all levels. Why should we raise taxes on anyone in this fragile recovery?”

Scott DeFife, executive vice president, policy and government affairs for the National Restaurant Association, said the NRA also would be lobbying for tax reform this year.

“It was apparent that comprehensive tax reform was not going to come to pass while policymakers tried to find consensus on the fiscal cliff, and the agreement did result in increased tax rates on some individuals as well as the expiration of the payroll tax holiday,” he said. “Comprehensive tax reform remains a top agenda item for 2013, and the National Restaurant Association will continue to advocate for operators’ desire to have a simpler tax code and lower rates.”

Some restaurateurs, however, say they are not particularly concerned about the tax increases. Commenting on the possibility of paying more in federal income tax this year, one New York City operator who wished to remain anonymous observed, “We pay so much in taxes here in New York already, what’s another couple of percentage points?”

Irwin Kruger, owner of ISK Systems, a Long Island, N.Y.-based Smashburger franchisee, said he’s not averse to paying higher taxes. “Increasing taxes on people who can afford them makes sense — it’s the right thing to do in this economy,” he said. “I mean, no one likes paying more taxes, but in light of the situation, I’m okay with it. I think it’s the only way to address some of the immediate issues confronting the economy.”

And despite the continuing sluggish economy, Kruger, a former McDonald’s franchisee, said his three Smashburger outlets are doing record business. "We hope to have 20 open over the next several years," he noted.

In addition to the new tax regulations, the Taxpayer Relief Act also extends several tax incentives for small businesses. They include:

? 15-year building depreciation schedule:Lawmakers extended through 2013 the 15-year depreciation schedule for restaurants, enabling operators to write off spending on new construction and improvements to existing buildings. The original measure set the depreciation schedule at 39 ? years.

? Work Opportunity Tax Credit: The law extends for one year a tax credit of up to $2,400 annually for operators who employ individuals from targeted communities and persons who are difficult to employ.

? Bonus depreciation: The measure, which also was extended for one year, allows operators to write off a new asset by up to 50 percent in the first year.

And while the industry generally praised lawmakers for extending these tax benefits, there also is some frustration that they all sunset at the end of 2013.

“It’s disappointing they’ve only been extended for a year,” the IFA’s Perron said.