Jan 17, 2014 - Chairman, Committee on Finance. 219 Dirksen Senate Office Building. Washington, DC 20510. Submitted via:
January 17, 2014
The Honorable Max Baucus Chairman, Committee on Finance 219 Dirksen Senate Office Building Washington, DC 20510 Submitted via:
[email protected] Dear Chairman Baucus: On behalf of the National Restaurant Association (NRA), we would like to provide our comments to the Chairman’s Staff Discussion Draft to Reform Certain Business Provisions, released on November 21, 2013. The staff discussion draft focuses on cost recovery and tax accounting reforms and contains a number of proposals that are important to our members. The restaurant industry plays a significant role in our nation’s economy. In 2014, the restaurant industry was expected to reach a record high of $683.4 billion in sales, representing 4 percent of the U.S. gross domestic product. Every dollar spent in restaurants generates an additional $2.05 spent in our nation’s economy. The restaurant industry is one of the nation’s largest private job creators and was expected to employ approximately 13.5 million people in 2014, representing nearly ten percent of the U.S. workforce. The restaurant industry is expected to add 1.3 million jobs over the next decade reaching 14.8 million by 2024. The restaurant industry job growth outpaced the overall economy in 14 consecutive years, from 2000 to 2013. Average sales in 2010 were $874,000 at a full-service restaurant and $773,000 at a quick-service restaurant. We are truly one of the cornerstones of this nation’s economy. It is also important to stress that the restaurant industry is an industry of small businesses. There are 990,000 restaurant and foodservice outlets in this country. Ninety-three percent of eating and drinking place businesses have fewer than 50 employees and more than seven out of 10 are single-unit operations. In addition, restaurants serve as the conference rooms for many of the self-employed and other small businesses. Accordingly, as the Committee undertakes its review of the tax code, the NRA believes it is important to examine corporate and individual tax reform simultaneously due to the restaurant industry’s organizational diversity. Since a variety of smaller pass-through entities make up a majority of restaurant businesses, only through comprehensive reform can a truly fair outcome be achieved. We also believe that marginal tax rates for both individuals and corporations should be reduced as much as possible. To date, the four staff discussion drafts issued by the Committee have not set forth the new marginal rate structure and, therefore, it is difficult to assess and comment fully on particular proposals without having the benefit of seeing the entire reform package.
As mentioned above, there are several specific provisions contained in the cost recovery and accounting staff discussion draft that directly affect the food service industry. We have reviewed the discussion draft and would like to offer the following comments and suggestions for improvement as your deliberations on tax reform continue. Section 179 Expensing The staff draft permanently expands and modifies the temporary increase in section 179 expensing. For 2014, the maximum amount taxpayers will be able to expense would be set at $500,000. After 2014, the amount is increased to $1 million, phasing out for qualifying property exceeding $2 million, with both thresholds indexed for inflation. The $1 million and $2 million amounts include advertising and certain other intangible assets subject to capitalization. Unfortunately, beginning January 1, 2014, the present-law provisions that allow certain real property to be expensed (i.e., qualified leasehold, restaurant and retail improvements), in the year purchased would not be included. The NRA supports making section 179 permanent, increasing the dollar amounts and indexing the thresholds. The NRA would urge the Committee to retain the modifications made in 2010 to make qualified real property eligible for section 179. Extending the 2010 improvements would allow restaurants to deduct the cost of qualifying property, rather than to recover such costs through depreciation deductions over the draft’s proposed 43-year period. As mentioned above, there are almost one million restaurant and foodservice outlets in this country. Ninety-three percent of eating and drinking place businesses have fewer than 50 employees and more than seven out of 10 are single-unit operations. Including qualified real property in section 179 would lower the cost of capital for these small businesses, encourage investment that would result in economic growth and job creation and would have the added benefit of simplification and compliance burden reduction for millions of business owners. Depreciation of Business Tangible Property The draft would adopt a four-pool approach for depreciation of tangible personal property that would allow assets to be depreciated at prescribed rates based on a 100 percent declining balance method. Pools are increased by new asset purchases and decreased by proceeds from assets taken out of service and prior depreciation allowances. The applicable recovery rates for the four pools are 38%, 18%, 12% and 5%, respectively. Account balances of less than $1,000 can be deducted immediately. Under asset pooling, businesses would keep track of different “classes of assets” thereby eliminating the need to calculate depreciation separately for each individual asset. The establishment of a depreciation system that sorts individual assets into specified property pools and calculates the allowance for depreciation based on specified
depreciation rates applied to the balance in the pool might provide taxpayers with a measure of simplicity. However, the elimination of the asset-by-asset accounting regime would come at a cost to taxpayers, since the applicable recovery rates selected for pooling regime would significantly slow the cost of recovery relative to current law. Moreover, the new regime would apply to property placed in service before the effective date, retroactively altering assumptions taxpayers may have made regarding their original investment. The financial impact on small businesses would be mitigated by changes made to section 179, but there would likely be significant costs to larger food service businesses with respect to property not eligible for section 179 treatment. The NRA supports the staff draft proposal authorizing the Treasury Department to issue guidance to reclassify assets to different pools and modify asset classes described in the revenue procedure to take into account changes in useful lives. Restoring Treasury’s authority would provide needed flexibility on a going-forward basis. Depreciation for Real Property The draft would extend the depreciation periods for non-residential commercial real estate from the present law period of 39 years to 43 years. The change is retroactive in the sense that it applies to all real property being currently depreciated, subject to a transition rule that reduces the 43-year period by the number of years for which the property has already been depreciated. The draft would not include the long-standing, yet temporary, 15-year depreciation schedule for qualified leasehold improvements, restaurant improvements and new construction or retail improvements. This provision would be made permanent in S. 749, bipartisan legislation introduced last year by Senate Finance Committee Members Bob Casey (D-PA) and John Cornyn (R-TX) which currently has 22 cosponsors. One principle of the tax code is that the costs of assets are allocated over the period in which they are used. Assets with longer expected lives are depreciated over a longer period of time, while assets with shorter lives are depreciated over a shorter period of time. As a reflection of this principle, the tax code contains a provision under which leasehold improvements, restaurant improvements and new restaurant construction, and retail improvements can be depreciated over 15 years rather than a 39-year recovery period that would otherwise apply to nonresidential real property. With more than 130 million Americans patronizing restaurants each day, restaurant building structures experience daily structural and cosmetic wear and tear caused by customers and employees. Moreover, NRA research shows that most franchise contracts require restaurant owners to remodel and update their building structures every six to eight years. Consequently, 15 years is a more accurate timeframe for recovering the cost of investments in restaurant buildings and improvements than 43 years.
A 15-year depreciation schedule also reduces the cost of capital expenditures and increases cash flow. As demonstrated in Figure 1 below, the annual tax savings and corresponding additional cash flow realized by restaurateurs from a 15-year, rather than a 39-year, depreciation schedule are considerable. For example, a restaurateur’s annual tax liability would increase by nearly $10,000 if the recovery period for a $1 million investment were increased from 15 years to 39 years, and more if the recovery period is changed to 43 years. A more accurate recovery period frees resources to expand business either through new hires or further capital expenditures. Figure 1. Sample Calculations for 15-Year versus 39-Year Depreciation Total Capital Expenditure on Eligible Property $100,000 $250,000 $500,000 $700,000 $1,000,000 $1,500,000 $2,000,000
Annual Depreciation Based on 39-year Schedule $2,532 $6,329 $12,658 $17,722 $25,316 $37,975 $50,633
Annual Tax Savings from Depreciation $608 $1,519 $3,038 $4,253 $6,076 $9,114 $12,152
Annual Depreciation Based on 15-year Schedule $6,667 $16,667 $33,333 $46,667 $66,667 $100,000 $133,333
Annual Tax Savings from Depreciation $1,600 $4,000 $8,000 $11,200 $16,000 $24,000 $32,000
Annual Difference in Tax Savings Between 15- & 39-year Schedules $992 $2,481 $4,962 $6,947 $9,924 $14,886 $19,848
Note: Figures are based on a 24 percent effective marginal tax rate Additionally, when restaurants invest in construction and renovations, the impact spreads throughout the economy. Figure 2 (see attachment) provides state-by-state estimates of the additional spending on restaurant improvements and new construction that would result from an extension of the 15-year depreciation provision in 2013, as well as the overall economic and employment impact within each state. However, over the years, the 15-year depreciation schedule has been temporary and subject to frequent extensions. Most recently, it was extended by the American Taxpayer Relief Act of 2012 retroactive to the beginning of 2012 and through the end of 2013. Consequently, the provision expired again on January 1, 2014. The piecemeal and temporary approach to the 15-year depreciation schedule presents taxpayers with unnecessary uncertainty and complexity. In March 2012, the NRA surveyed a sample of nearly 600 restaurant operators who took advantage of the 15-year depreciation provisions between 2005 and 2011. The survey revealed that 30 percent of restaurant operators said they put projects on hold in 2012 when the provision lapsed because of the uncertainty surrounding the extension of the 15-year depreciation provision. With single-unit restaurant operators reporting an average expected project cost of $40,000, and multi-unit operators reporting an average
expected project cost of $500,000, the additional construction activity from these restaurant projects put on hold would have exceeded $7 billion in 2012. Based on economic multipliers from the Bureau of Economic Analysis, the overall economic impact of these restaurant construction projects would have exceeded $23 billion, with a total employment impact of nearly 200,000 additional jobs across all U.S. industries. Using tax reform to make permanent the 15-year depreciation schedule for leasehold improvements, restaurant improvements and new construction, and retail improvements would address this problem, providing taxpayers with predictability, simplicity, and fairness. The ability to plan for these expenditures and know what the tax treatment will be in the future is important to those who are making business decisions in today’s economy. The NRA supports bipartisan legislation to make permanent the 15-year schedule that was introduced by Finance Committee members Senators Casey and Cornyn last year. This bill, S. 749, currently has 21 co-sponsors and the NRA would urge its inclusion in the Committee’s tax reform package. Amortization of Intangibles The staff discussion draft would increase the amortization period for section 197 intangibles from 15 years to 20 years. Similar of other transition rules in the draft, the adjusted basis of a section 197 intangible placed in service prior to the enactment of this provision is depreciated over a term of 20 years reduced by the number of taxable years for which the intangible had already been amortized. The definition of a section 197 intangible includes a franchise agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods , services or facilities within a specified area. The NRA is concerned that the proposed new regime would retroactively apply to intangible property common in the restaurant industry, such as franchise agreements, that have been placed in service prior to the date of enactment. Taxpayers will be required to increase the remaining recovery period of existing section 197 intangibles by five years and amortize the remaining basis over such period. Expensing Start Up Costs The NRA supports the staff draft proposal that would consolidate start-up expenditures and organizational costs into a single rule. The amount that can be immediately expensed is increased from $5,000 to $10,000, phased out for expenses in excess of $60,000. Advertising Expenditures Under the staff draft, 50 percent of advertising expenses would be deducted in the year paid or incurred and the remaining 50 percent would be capitalized and amortized
over a five-year period, beginning with the midpoint of the year in which the expenses are paid or incurred. The staff discussion draft’s proposal requiring the amortization of advertising expenses represents a significant change from current law. Presently, the deduction for advertising costs promotes tax fairness because it is central to allowing a business to properly calculate its net income and the amount of tax it must pay, just the same as the deduction for employee salaries, rent, utilities, and the other ongoing costs of a business. Advertising is not a special preference or deduction, it is a normal and necessary expense that a business must pay to communicate with customers and generate sales. The tax code has permitted the full deductibility of advertising costs for the entire life of the corporate income tax. Most restaurant advertising is time-sensitive aimed at pushing a particular sale and has a very short shelf life. The NRA opposes this proposal. Conclusion On behalf of the National Restaurant Association, thank you for the opportunity to share our views on the staff discussion draft. We applaud the commitment of policy makers to make the tax code more certain, fairer, simpler while encouraging economic growth and job creation. As the Committee moves forward with its deliberations, we look forward to working with you and would be pleased to serve as a resource. If you have any questions, please feel free to contact me at (202) 331-5905. Sincerely,
David G. Koenig Vice President, Tax & Profitability National Restaurant Association 2055 L Street, NW Washington, DC 20036
Figure 2. Estimated Impact of Extending 15-Year Restaurant Depreciation Provision Through 2013
State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming United States
Increase in Spending on Restaurant Improvements & New Construction (in millions) $78 $21 $113 $53 $851 $130 $101 $22 $26 $380 $194 $42 $40 $312 $134 $81 $60 $75 $87 $42 $129 $193 $224 $118 $47 $127 $39 $48 $58 $39 $254 $37 $595 $190 $22 $254 $70 $117 $330 $39 $98 $25 $109 $427 $48 $21 $166 $187 $38 $173 $17 $7,081
Total Economic Impact Within the State (in millions) $170 $37 $233 $104 $1,953 $293 $192 $41 $31 $785 $441 $80 $71 $728 $294 $144 $115 $161 $182 $82 $250 $382 $482 $251 $94 $275 $73 $80 $109 $78 $550 $71 $1,075 $391 $38 $584 $150 $241 $781 $71 $214 $42 $246 $1,068 $112 $39 $345 $408 $73 $362 $29
Total Employment Impact Within the State (total jobs in all industries) 1,591 263 1,913 961 13,122 2,264 1,250 269 42 7,054 3,818 609 718 4,870 2,381 1,293 900 1,406 1,518 834 1,758 2,474 4,051 1,957 872 2,145 748 723 801 586 3,468 659 7,049 3,665 307 4,840 1,424 2,018 5,728 539 2,016 416 2,035 8,210 1,012 384 2,645 3,010 627 3,036 241
$23,944
199,830
Source: National Restaurant Association estimates, with economic and employment impact based on BEA multipliers Note: State impact figures do not sum to the U.S. total, because they only include inputs within each state.
