Maybe Washington politicians aren’t as tone deaf as we think. Not only did restaurant owners wind up with some juicy breaks in the tax deal signed into law last Friday. They’ll also save a bundle when the Federal Reserve’s proposed new rule governing debit card transaction fees kicks in. Lower taxes, a little extra revenue: it looks like Christmas came early this year.
The tax bill, formally known as the “ Reid Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010,” has something for almost everyone. The National Restaurant Association sums up the bill’s key provisions for restaurant owners this way:
• Allow businesses to fully expense capital investments in 2011.
• Extension for 2010 and 2011 of many expiring tax provisions, including 15-year depreciation for restaurant property.
• Extension through 2011 of the Work Opportunity Tax Credit (WOTC).
• Extension through 2012 of the individual rates for all taxpayers.
• Estate tax treatment for 2011 and 2012 at a 35 percent rate with a $5 million exemption.
• Reduction in the Social Security payroll tax for individuals from 6.2 percent to 4.2 percent in 2011.
We’ll bet the first item on this list definitely caught your eye. So should you loosen up the purse strings and start pouring money into your restaurant this year? Keep in mind that the “full business expensing” for 2011 enables you to deduct 100 percent of the cost of new business equipment such as chairs for your dining room, a new freezer for the kitchen and a new computer for your office. Your taxable income is reduced dollar-for-dollar by the amount you spend to purchase these items.
Seems like a can’t-lose proposition, no? But you may already be receiving this benefit under what’s known as “Section 179 expensing.” Small businesses have been able to expense the first $500,000 of business tangible personal property purchases dollar-by-dollar already. So this new law may not deliver any extra benefit for you.
Larger restaurant organizations, or medium-sized ones whose purchases hit the $500,000 cap, couldn’t take this immediate deduction prior to the passage of this bill. They had to depreciate new assets over time, not expense them in the same year. So-called “bonus depreciation” measures have allowed large and midsized restaurant companies to expense part of the value of their purchases, but they had to depreciate the rest. Now they can expense the whole works.
Thus really big companies look to be the major beneficiaries of the provision that enables full expensing of capital investments in 2011. But restaurants of all sizes should see a little extra revenue hit their books once the Federal Reserve imposes new rules on interchange fees for debit card transactions. You can read the blow-by-blow about it here: www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm.
Right now, the Fed estimates that fees amount to about 1.14 percent of each debit card transaction, roughly 44 cents per transaction on average. Its idea is to reduce this rate “significantly,” to the point that “It allows for the recovery of per-transaction variable costs for a large majority of covered issuers.”
We don’t know yet what the proposed rate will be. The public comment period runs through Feb. 22, 2010, and the proposed rule will be issued after that.
One of those comments is sure to come from the American Bankers Association. Its president, Edward Yingling, recently released this statement. “Retailers have paid fees to support this cost-effective system and have taken advantage of the many benefits it affords, including increased sales and fraud protection. Yet they have always wanted to find a way to benefit from the system without having to pay for it.”
Hmmm. Restaurant operators think the card issuers are ripping them off, while the card issuers now accuse restaurant operators of ripping them off. We’re glad the Federal Reserve has to resolve this one. We can assume from the bankers’ injured tone that it’s not going to go their way.
Be sure to talk over both these issues when you meet with your accountant to do your restaurant’s 2010 taxes. Either or both could affect your business in a helpful way in 2011.