4Thought Blog

The largest tax change in a generation was made almost two years ago, but it’s still big news for small businesses. In fact, final regulations are still being written. As we prepare to head into fall, this is a good time to think strategically about your tax situation.

This article will highlight a couple of key business tax changes for McDonald’s franchisees, specifically depreciation changes and something new called the qualified business income deduction.

Despite evolving customer expectations, continued pressure on profit margins and fierce competition, the restaurant industry fared well through the first quarter of 2019, with same-store sales up an overall 1.5%. To preserve profitability and reclaim foot traffic, many industry players are recognizing that a departure from business-as-usual is the key to continued success.

But, given the maturity of the restaurant sector, what does this departure from business as usual entail? For some, it means making enhancements to their digital presence, rolling out delivery capabilities, or introducing promotions and loyalty programs to drive same-store sales and offset increasing labor costs.

Great news! Important tax guidance was released in late December 2018 that is considered to be a significant victory for the restaurant industry: Employee Shift Meals Remain 100-percent deductible for tax purposes.

Hiring young people can be beneficial for all parties. But before McDonald's franchisees make any job offers, you should be fully aware of how youth employment is regulated under the Fair Labor Standards Act. When employers fail to comply with these obligations, they can be prosecuted by the Department of Labor. And if the prosecution is successful, the DOL will likely publicize the results as a sobering reminder to all employers of the FLSA requirements.

A sixteenth century English romance writer named George Pettie once quipped, “So long as I know it not, it hurteth mee not.” In other words, what you don’t know can’t hurt you.

While the merits of this sentiment may be debatable, one version of the opposite certainly is not: What you do know can help you. Especially when it comes to your McDonald’s business: Financially speaking, what you know or can learn from past performance – both recent and over time – will help you make better decisions in the future.

Regular analysis of certain metrics is how you can make your business more profitable, avoid making poor decisions (again), and separate yourself from the ever more crowded marketplace. One such financial metric that is often overlooked yet unquestionably important for you to analyze and understand is contribution margin.

Restaurant owners who invested in interior improvements in 2018 may be surprised when they receive their 2018 tax returns and see higher than expected tax liabilities. This is a result of an inadvertent drafting error in the Tax Cuts and Jobs Act (TCJA) relating to the depreciation of restaurant improvements.

Before the TCJA, the tax law provided rules for multiple categories of restaurant property assets, many of which were eligible for favorable tax depreciation benefits. To simplify the rules, tax reform consolidated the categories applicable to interior improvements into the single category of Qualified Improvement Property (QIP).

Today (and since 2004) salaried employees who earn at least $455 per week aren't eligible for overtime pay under the Fair Labor Standards Act, if their job duties are executive, administrative or professional (EAP) in nature. That's true no matter how many hours these employees work in a week. 

Under proposed regulations, the limit would rise to $679 in 2020. So, salaried employees earning up to around $35,308 annually would be overtime-eligible even if they fall into those EAP job roles as defined by the Department of Labor (DOL). 

Although the jump in the threshold is substantial, it's not nearly as high as the $913 weekly pay threshold set in an earlier version of the proposed regulations. If that version — which was blocked by a federal judge — had passed, it would've been much more costly to employers.

Now that tax reform through the Tax Cuts and Jobs Act of 2017 is no longer breaking news, it’s time we take a closer look at a question that arose for McDonald’s franchisees as a result of the change in the tax law.

One of the headline reforms of the new legislation was the slashing of the corporate tax rate from the graduated maximum of 35% to a flat 21%. This begged the question, “Is it now more beneficial for a McDonald’s Owner/Operator to be a C Corporation than a pass-through S Corporation?”

Without examining the merits of the latter choice of entity type, let us instead lay out some (but not all) of the pros and cons of operating your McDonald’s business as a C Corporation.

Growing your business is the primary focus of every entrepreneur. Whether growth occurs by way of increasing sales and cash flows at existing business divisions or via acquisition and expansion, the challenges faced are often strikingly similar.

That being said, let’s examine for a moment the prospects and hurdles one will often face when buying a new restaurant, through the lens of a turnaround CFO.

The business world is in for a major generational shift – a recent survey found 79% of business owners plan to exit their businesses within the next 10 years.

The survey, conducted by the Business Enterprise Institute and the Conway Center for Family Business, found more surprising statistics. Only 30% of family-owned businesses succeed in transitioning their business to the second generation, and only 10% succeed in making it to the third generation!