On December 22, 2017, the President signed HR.1, the Tax Cuts and Jobs Act (the Act) into law. There are several significant provisions that went into effect beginning on January 1, 2018. Some provisions will result in tax increases to restaurant owners and operators, but many will result in tax decreases including a new tax deduction of up to 20% of “qualified business income” (QBI). This new deduction in particular should provide a substantial tax benefit to individual owners and operators of restaurants with QBI from a partnership, S corporation, LLC, or sole proprietorships. This income is sometimes referred to as “pass-through” income.
The deduction is 20% of your QBI from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your restaurant and other associated trades or businesses. QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership's business. In other words, the deduction is calculated on the net business income from your business after subtracting amounts that are paid to the business owner in the form of wages or guaranteed payments. Each trade or business is evaluated separately with regard to this 20% deduction.