Did Tax Reform Leave Franchises Out in the Cold?

With generous corporate tax write-offs and rates, the Tax Cuts and Jobs Act has been well received by nearly every industry. Unfortunately, a simple error has prevented franchisees from reaping many of its benefits.

Jerry Riegel August 9, 2018

In the fall of 2017, as the buzz around possible tax reform reached a fever pitch, business owners were anticipating good things to come. But when the Tax Cuts and Jobs Act (TCJA) was signed into law on Dec. 27, 2017, many were left scratching their heads. Although the new tax law included a “100 percent bonus depreciation” provision that allowed businesses to fully write off certain property and capital improvements, it wasn’t all welcome news: the provision omitted the category of qualified improvement property.

Unfortunately, it gets even worse. The TCJA also failed to designate this category for a 15-year recovery period. Because lawmakers had grouped qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property into the qualified improvement property category, recovery periods for these investments now stretch from 15 to 39 years, effective Jan. 1, 2018.

It turns out the exclusion was simply an oversight on the part of Congress—one we hope they will correct very, very soon. In the meantime, it could have significant ramifications for business owners across several industries, and particularly for franchisees. Here are a few things you should know about it.

Fiscal-year businesses may already be feeling impacts

Because the TCJA went into effect on Jan. 1, 2018, franchisees operating on a fiscal-year schedule may already be experiencing a higher tax burden for qualified property improvements. While we expect Congress to introduce a bill detailing a correction soon, the timing is uncertain, especially given the upcoming elections.

If Congress does pass the bill, we anticipate they will make the change effective retroactively. Fiscal-year businesses will have to decide whether to extend their tax returns and wait for the change, or file their return as planned and later, if necessary, file an amended return.

Thinking of making improvements? Proceed with caution

Many franchisees may be under pressure from corporate franchise owners to make property improvements, or had previously scheduled improvements for 2018. But now the associated tax burden is much greater than before the TCJA passed. If you’re in this situation, you may want to consider holding back on as many improvements as you can—at least until Congress passes a bill for the correction. If you choose to proceed, be sure to review your financing and cash flow requirements.

We’re monitoring the situation—and hoping for the best

As a Minneapolis CPA firm, DS+B is helping many franchisees determine their next step while keeping an eye out for new developments. We expect (and hope) that lawmakers will correct the technical error in the near future. If you have questions about your fiscal-year tax return or how this limbo could affect your plans for 2018, please don’t hesitate to give us a call.