Happy belated New Year to all of our clients, friends, and family. We hope you all had a blessed Christmas holiday – even though it feels like it was years ago now! 2019 is in full swing with many new law changes influencing the restaurant and retail industries. Today we’re laser focused on the effects of rising wages and the new tax code on businesses. Restaurants and retailers must confront these new realities to remain competitive in this era of disruption.
“Ah, taxation without representation, brother.”
The Tax Cuts and Jobs Act of 2017, infamously known as the GOP tax bill, was intended to stimulate economic growth and simplify one of the most complex tax codes in the world. Though restaurants and retailers have both benefitted from the overhaul, one new provision has created a litany of challenges for businesses who intend on remodeling their physical storefront locations. A critical error in the new tax code now requires restaurants and retailers to depreciate commercial building renovations over a period of 39 years. Under previous law, companies were able to write off half the cost during the year the work was completed while depreciating the remainder over 15 years. And while many of the most powerful trade associations, including the National Retail Federation and National Restaurant Association, aggressively lobby Congress to rectify the issue, we shouldn’t hold our breaths for long in a deeply divided House and Senate. The economic turmoil from this new tax code is “delaying remodeling projects and causing retailers to decline opportunities to purchase or lease buildings that would require extensive work” stated the NRF in a letter sent to all members of the House and Senate.
“It’s all about da’ money.”
Restaurants and retailers have enjoyed the luxury of cheap labor for years. This trend reversed in 2018 and continues into 2019 with growing momentum. A spectacular combination of an expanding economy with a tight labor market have forced the likes of retailers including Amazon, Walmart, and Target to drastically increase wage compensations and employee recruiting efforts. This is putting downward pressure on restaurants and other retailers, who now must compete against these companies for the same talent pool. Unlike retailers, restaurants are more reluctant to increase menu prices and pass the additional cost to their guests. Even so, higher labor and food costs are proving too much to bear for the restaurant industry, as this past December restaurants raised menu prices the most in more than seven years. According to the U.S. Bureau of Labor Statistics, in May 2017 food preparation workers and servers received mean annual wages that were half those the U.S. average. Today, businesses would have to scout high and dry for the same cost effective labor. “The last 18 to 24 months, it’s been very competitive, no matter what time of year,” says Bjorn Erland, vice president for people and experience at Yum! Brands Inc.’s Taco Bell Chain. “I don’t think it’s going to ease up much just because the holidays are over.”
The key factors influencing this trend of increased wages are the recent legislative minimum wage increases at the local government levels. Though Congress has not changed the Federal minimum wage since 2009, states such as Washington and California have taken the initiatives of increasing their minimum wages respectively. The state of Washington set a new minimum wage of $12 an hour, with an additional increase to $13.50 an hour by 2020. Employers in Washington are also now required to provide paid sick leave for all employees. California reflects a new minimum wage of $11 an hour this year, with additional annual increases scheduled until it reaches $15 an hour by 2023. Some major metropolitan cities have been even more aggressive raising the minimum wage. Seattle raised the minimum wage to $15 an hour in 2017. In 2020, Los Angeles is scheduled to implement a new minimum wage of $15 an hour. This year, nine cities around the San Francisco Bay Area have increased the minimum wage to $15 an hour, with more Bay Area cities to join the list next year. And finally, New York City begins 2019 with a new $15 an hour minimum wage. With sharp wage increases taking effect, businesses of all sizes are scrambling to cover these additional operating expenses. In the long term, restaurants need to find new ways to work around shortages because the tight labor market isn’t going away anytime soon, says Michael Harms, vice president for operations at researcher TDn2K, which tracks restaurant industry employment trends. “Restaurants are going to have to rely on technology to replace these workers,” he says. “I don’t see a lot of relief on the way.”
“It’s ok to double dip – seriously”
Though restaurants and retailers will not find the construction remodeling tax breaks they’re hoping for, the Tax Cuts and Jobs Act has created enormous opportunities to cost efficiently digitally transform your business. For the next four years the new tax code allows companies to immediately deduct the entire cost of capital equipment purchases from their taxable income. Previously, businesses were limited to write off a portion of the cost, and only for a single year. For example, if a company buys a digital solution for $50 thousand, it can write off the $50 thousand immediately, rather than recover the $50 thousand over the life of the solution. When deployed correctly digital transformation investments yield immense rates of return immediately. The solution’s rate of return value is then applied directly to the bottom line for the entire life cycle of the solution. The rate of return is reflected through labor savings, cost savings, and streamlining of nonvalue processes. This sweet package of meaty tax deductions and sharp cheddar to the bottom line is the ‘double dip effect.’ Restaurants and retailers whom make use of these opportunities stand to harvest advantageous gains, over those that stay stagnant in their comfort zones.