“New Tax Law Changes for Multi-Unit Restaurant Operators”		«BACK
	by Dennis L. Monroe
	from Krass Monroe, P.A.

In this article, we will address the following topics: alternative minimum tax changes and opportunities, ESOP opportunities, work incentive credits and capital gains.

ALTNERATIVE MINIMUM TAX CHANGES

The 1997 Act repeals the corporate AMT for small business corporations for tax years beginning after December 31, 1997. Small business corporations are designated as corporations with average gross receipts of less than $5 million ($7,500,000 for taxable years beginning after December 31, 1998). Alternative minimum tax has been a nemesis to smaller corporations, especially those with restaurant equipment. The new law allows small corporations to avoid the alternative minimum tax and, thus, realize substantial tax savings. In addition, this change will reduce some of the tax compliance burden on small corporations.

This small business corporation exception is wonderful. But more significant to the restaurant industry is the change in the alternative minimum tax for acquisitions of assets after December 31, 1998. Under the new law, the recovery periods for calculating depreciation for purposes of alternative minimum tax and regular tax are the same. This change will significantly reduce the onerous impact of the alternative minimum tax for persons utilizing accelerated depreciation. Congress believed this approach would help stimulate capital formation and felt that the previous law inhibited the acquisition of capital assets.

ESOPS

Is there an ESOP in your future? It has become more and more common for us to see multi-unit operators look at the ESOP as a way of diversification, estate planning and tax avoidance. Prior legislation allowed an ESOP to be a shareholder of a sub-chapter S corporation. However, this change really did not help because the law provided that there was tax paid on the income attributable to the ownership by the ESOP trust of the S corporation. This has been changed. Now, the trust is not subject to tax on the net income from the sub-chapter S corporation. So, in effect, the ESOP shelters a substantial portion of the income at the corporate level. However, there are a number of other rules that may reduce the utilization of an S corporation ESOP. One is the disallowance of the tax free rollover of proceeds from the sale of stock. One potential way to have the best of both worlds would be to set up the ESOP as a C corporation, roll over the proceeds tax-free, and then elect S status. Also, there are some limitations on the amount of deductible contributions that can be made to the ESOP. Nevertheless, the ESOP is something to be aware of and consider. The tax savings can be substantial.

WORK INCENTIVE CREDITS

As you are all aware, there is a labor shortage. This whole issue may be helped by the new welfare-to-work credit. For wages paid to long-term family assistance recipients who begin work after December 31, 1997, and before May 1, 1999, an employer will receive a credit for the first and second year wages equal to 35 percent of the first $10,000 of eligible wages and 50 percent of the first $10,000 eligible wages in the second year. The maximum credit is $8,500 per employee. This allows an employer to potentially pay above market wages and still, in effect, get a lower than market rate cost for employees. Employers should keep this provision in mind in addressing your employment needs. In addition, there still exists a work opportunity credit for wages paid to individuals who belong to certain targeted groups.

CAPITAL GAINS

There has been so much written on capital gains that I am not going to go into detail as to the changes in the law. However, it is important to keep a couple things in mind in your planning. First, a stock sale is usually much more desirable when disposing of a business than an asset sale. We have had a number of situations in our office where we have used a stock sale versus an asset sale and have been able to lower the price for the buyer and end up with more proceeds in the seller’s pocket. In addition, creative allocations to franchise rights outside the corporation, use of charitable remainder trusts and possibly an election by the buyer under Section 338 to treat the transaction as an asset sale, may make a stock sale a reality and, thus, take advantage of the lower capital gains tax rate.