Fair tax relief finally is on the way for U.S. restaurateurs

Nation's Restaurant News,  Nov 5, 2007  by John Gay

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Few, if any, Americans pretend that the nation's tax code contains much logic or fairness. But some of its provisions, many Americans believe, are positively discriminatory. Take the commercial real estate we all find ourselves in when we fill the tank up with gas, catch a movie or grab a bite to eat. Today we can buy food at amusement parks, gas stations and convenience stores as well as restaurants. Yet the buildings that house these food outlets all are taxed differently by the Internal Revenue Service.

Tax deductions are complicated, but suffice to say that just as homeowners can deduct their mortgage interest payments from the income on which they pay federal taxes, so companies can deduct legitimate business expenses from their profits before taxes. In the case of the buildings in which companies are housed, the IRS allows businesses to deduct the cost while those buildings depreciate in value--in other words, after the company's owners have gotten good use out of them.

Gas stations and convenience stores, where many of us buy food from time to time, can deduct the cost of their buildings from taxes over 15 years. Yet restaurants must deduct the cost of their buildings over 39.5 years to do this, more than twice as long as convenience stores. Even amusement park food outlets can deduct the cost of their building from their tax return over seven years.

Almost 40 years is a long time in an economy like ours in which one-third of new firms don't survive two years and five in 20 last only four years. Restaurants are predominantly small, independent and family-owned businesses, meaning profit margins are tight. The typical table service restaurant makes only 4 cents on every dollar customers bring through the door--before taxes.

While restaurant patrons bring dollars through the door, the very act of them arriving through the door costs money. Every day nearly half of all adult Americans eat out. Many dining establishments are open seven days a week, 18 hours a day or more. That's much more customer traffic than in the average business, causing everything from entrances and lobbies to flooring and interior walls to deteriorate rapidly.

When restaurants aren't refinishing, remodeling and relocating due to customer-driven wear and tear, they often are working to keep those four cents on the dollar by upgrading to accommodate changing consumer preferences and, perhaps, keeping up with the eatery next door. Trying out the new place, with its brand new fixtures and fittings, tempts even the most loyal restaurant patrons.

And what about fairness, you might ask? Restaurants that compete for your dollar with food sold at convenience stores and amusement park food stores shouldn't have to wait decades longer to offset one of their key assets--their accommodations and location--against their taxes. Most restaurants remodel and update their buildings every six to eight years, according to National Restaurant Association research, far more frequently than the IRS's 39.5-year depreciation schedule allows for.

Lawmakers have made some effort to address the tax code's unfairness in recent years, but all of these have proved temporary. In 2004, Congress authorized a 15-year depreciation schedule for restaurants that put limited building improvements in place by the end of 2005. The result was a boon for the nation's economy: Restaurateurs spent 42 percent more on construction than in the previous year, according to the U.S. Census Bureau. The extra spending created thousands of jobs in construction-related industries nationally, in addition to the restaurant industry.

Last year, Congress extended tax relief to restaurants that lease space in large buildings and restaurants that make improvements to their existing buildings. But the provisions don't cover new restaurant construction in stand-alone buildings, despite the fact that many restaurants reside in single-use, stand-alone buildings because that is what design and safety requirements dictate.

Now help at last is on the way. Recently, Reps. Patrick Tiberi, R-Ohio, and Kendrick B. Meek, D-Fla., introduced a bill that would cut the long depreciation schedule for restaurants from 39.5 years to 15 years, which is in line with competitors who also sell cooked food to the public. Ohio alone has over 400,000 employees working in restaurants--in an industry that employs one in 10 of the nation's employees and that has created one in five new jobs this year. They'll be waiting to hear if Congress supports tax fairness for local restaurants.

This article does not necessarily reflect the opinions of the editors and management at Nation's Restaurant News.

John Gay is senior vice president for government affairs and public policy at the National Restaurant Association. Visit online at www.restaurant.org.

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