Tax Cuts Feed Growth to the Food and Beverage Industry
Tax Reform will shake up the food and beverage industry in many ways, we don’t want clients to get caught unprepared or leave financial opportunities on the table.
The Tax Cuts and Jobs Act (TCJA) puts American grocery manufacturers, food distributors, retailers and restauranteurs on a level playing field with the rest of the world by lowering corporate tax rates which will drive economic growth in the industry as well as investments in innovation. Combined with a new tax rate for pass-through entities and increased consumer purchasing power it will mean more job creation!
Rising commodity and labor costs have been creating pressure on margins. Now that tax reform is a reality, there may be the possibility of operating at a higher profit margin than the current low averages. Food and beverage companies have historically operated on thin margins, so it is important now more than ever to examine factors that will have an impact on profitability.
Here are the top ten tax changes that will impact food and beverage businesses for better or for worse:
2. Tax break for individuals, estates and trusts that own interests in pass-through business entities with a new 20% deduction based on qualified business income (QBI). Unfortunately, there are limitations and the QBI calculations are somewhat complex.
3. The maximum amount of future annual taxable income that can be offset with Net Operating Loss deductions in a given year is generally reduced from 100% to 80%. NOLs can now be carried forward indefinitely.
4. The amount a business or taxpayer may expense under bonus depreciation increases from 50% to 100% for property placed in service after September 27, 2017 and before January 1, 2023. The amount allowed as bonus depreciation after 2022 will be reduced by 20% until it is fully phased out in 2027.
5. The amount a business may claim as an immediate deduction under Section 179 will increase from $500,000 to $1 million. Phase out threshold will now be $2.5 million.
6. Starting with 2018, businesses generally cannot deduct interest expense in excess of 30% of “adjusted taxable income.” For S-corporations, partnerships and LLCs treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level. There are some exceptions.
7. Excess loss limitation applies to amounts in excess of $250,000 (or $500,000 for a married taxpayer filing jointly). Losses disallowed under this rule are carried forward to later tax years and can then be deducted under the rules that apply to NOLs.
8. In order to receive long term capital gain treatment, the allocation of income that a partner receives for services performed is now subject to a 3 year holding period.
9. Entertainment expenses are now fully non-deductible.
10. Meal expenses incurred during business travel are still 50% deductible.
In addition to financial factors impacted by tax reform, new packaging and delivery platforms, changing technologies, shifting consumer preferences, the trends to lean and green, and an increase in mergers and acquisitions, will make the food and beverage industry even more competitive moving forward. How will you and your company position yourself, and improve products and operations to increase revenue?
Our recipe for success includes an analysis to discover underperforming products that should be discontinued and unprofitable markets that should be abandoned. Correcting poor inventory management and supply chain problems may go a long way to improving profitability as well. We suggest examining contracts with low-margin clients and purging clients that are consistently in arrears. It may also make sense to concentrate on enhancing customer service and raising product quality to increase customer retention rates and attract new business.
Contact Us: Tax planning is as essential a part of the strategy for success as is operations, finance, technology, and human capital. No matter what facet of the food and beverage industry you are in whether manufacturer, distributor, importer or exporter, retail, etc., our Fuoco Group professionals can provide the perspective and insight needed to grow your business and capitalize on tax reform opportunities while minimizing tax liabilities. Contact our industry specialists toll free at 855-534-2727.
***Thank you to Fuoco Group client Farmer’s Table for the delicious looking images from their daily menu!
