Navigating Tax Credits and Incentives in the Hospitality Industry

At a glance

• The main takeaway: There are many tax credits and incentives available to the hospitality industry that boost financial performance.
• Impact on your business: When expanding to a new market or location, it is essential to consult with your advisor regarding available credits and incentives.
• Next steps: Aprio’s Restaurant, Franchise & Hospitality team can help you assess these financial opportunities so you can make informed business decisions about which incentives to pursue.

Schedule a consultation

The full story:

There are many tax credits and incentives available to the hospitality industry that boost financial performance. When expanding to a new market or location, it is essential to consult with your advisor regarding available credits and incentives. These financial opportunities can be pivotal in shaping your growth strategy while establishing your presence in the area. Assess the options with a knowledgeable advisor so you can make informed business decisions about which incentives to pursue, ultimately boosting your financial performance and enhancing your competitive advantage in the new market.

Exploring key tax credits available for hospitality professionals

The Work Opportunity Tax Credit (WOTC) provides financial incentives for hiring targeted groups, boosting cash flow, and unlocking tax savings. This credit encourages businesses to consider the demographics of their employee base and the locations of their operations. In addition to creating opportunities, WOTC is a financial incentive; eligible employers can receive tax credits ranging from $1,200 to $9,600 per qualifying employee, which can substantially offset federal tax obligations for businesses with a large workforce.

Integrating WOTC into the human resources function requires careful management, as eligibility is based on information employees disclose during onboarding. Employers must adhere to specific forms and deadlines set by the Department of Labor to secure certification for the tax credit, making collaboration with payroll providers or third-party professionals essential for effective administration. Engaging a tax advisor can help businesses appropriately evaluate and leverage WOTC, assuring compliance while boosting the financial benefits of this program amidst challenges such as seasonal hiring and high training costs.

The FICA tip credit is an essential federal incentive for employers, particularly those with tipped employees in the food and beverage industry. You are eligible for this credit if you are an employer within the food and beverage industry who has employees who receive tips from customers for providing, delivering, or serving food and beverage, and as the employer, you pay the Social Security and Medicare taxes (FICA taxes) on those reported tips. It is available whether or not the employee reports those tips on their own tax return.

The credit only applies to the excess of what is needed to get an employee’s hourly wage up to the federal minimum wage in effect as of January 1, 2007, which is $5.15 an hour.  The credit enables employers to recover a portion of the FICA taxes paid on those excess tips, providing relief from payroll tax costs.

We recommend working closely with your payroll provider and tax advisor to calculate, track, and claim this tax credit. Employers should confirm that their payroll systems  identify them as restaurants with tipped employees to track the FICA tip credit accurately. 

Internal Revenue Code Section 48 provides a tax credit for businesses investing in energy-related projects—up to 30% of the cost of the project if the Wage and Apprenticeship Requirement is met and the credit can be transferred. Investing in energy-efficient improvements for your restaurant, such as upgraded lighting and HVAC insulation, may qualify you for the 179D or 45L tax incentives. These financial incentives can significantly reduce your building’s overall energy or power costs, and is particularly relevant if you’re planning a ground-up construction or major renovation.

The 179D and 45L tax incentives support financial savings for restaurant operators and aligns with growing consumer expectations for greener practices in the hospitality sector. Consult your advisor about the potential benefits of energy efficiency improvements for available opportunities for offsetting costs while aligning with industry trends.

If you have constructed, purchased, expanded, or remodeled your restaurant or retail space, an Aprio Cost Segregation Study could provide significant tax savings to increase cashflow. Cost segregation studies identify and classify nonstructural building property costs into their appropriate “MACRS lives” for depreciation of 5, 7 and 15 years, far sooner than structural elements that must be depreciated over 39 years.

The phaseout of bonus depreciation significantly impacts the hospitality industry, particularly for businesses with substantial capital expenditures. Bonus depreciation enables hotels, restaurants, and other hospitality-related businesses to write off a large percentage of the cost of their capital assets upfront rather than spreading the expense over many years as required by standard depreciation rules.

Under the TCJA, businesses could deduct 100% bonus depreciation for qualified property from September 2017 to the end of 2022, compared to 50% in previous years. The phase-out started in 2023 with a 20% reduction, decreasing by another 20% each subsequent year until January 1, 2027. Remember, different states have varying rules regarding bonus depreciation, so it’s important to consult with a CPA who understands the specific state regulations.

The Empowerment Zone tax credit incentivizes business owners to develop in specific urban or rural areas undergoing revitalization. This federal tax credit is particularly advantageous for restaurants that hire locally and operate within these designated zones. It functions as a per-employee credit based on qualified wages for employees living and working in the Empowerment Zone.

In addition to federal incentives, numerous state tax credits exist to support businesses revitalizing specific areas. These may include hiring credits, retraining credits, and similar job creation incentives to foster local economic growth. As your business is growing quickly, you need to make sure that you are strategically complying with all of the ever-changing state and local tax (SALT) rules and requirements.

The bottom line

Aprio’s Restaurant, Franchise & Hospitality team is committed to supporting your restaurant or franchise by leveraging valuable services to improve your financial advantages. Our team can help you navigate the complexities of tax incentives, empowering you to focus on delivering exceptional experiences to your guests.

Related Resources/Assets/Aprio.com articles/pages

• Restaurant, Franchise & Hospitality Page
• Making the Most of Tax Deductions with Declining Bonus Depreciation
• FICA Tip Credit for employers