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How 2025 Tax Reform Will Impact Restaurants and Hospitality Businesses

Article

July 30, 2025

On July 4, 2025, President Trump signed P.L. 119-21, Republicans’ “One Big Beautiful Bill Act,” into law, marking the most sweeping tax overhaul since the 2017 Tax Cuts and Jobs Act (TCJA). While the legislation spans a wide range of sectors, several provisions are particularly relevant to the restaurant and hospitality industry. From accelerated cost recovery to tip and overtime relief, the 2025 tax reform introduces both opportunities and planning considerations for owners, operators and investors.

Below is a breakdown of the most impactful provisions and how they affect restaurants, hotels, franchise groups and hospitality management companies.

Explore our detailed analysis to dive deeper into the provisions of the 2025 final budget reconciliation bill.

5 Tax Reform Provisions Affecting the Restaurant & Hospitality Industry

Learn about the top five tax reform provisions that will impact the restaurant and hospitality industry, including changes to depreciation, expensing and other key areas.

1. 100% Bonus Depreciation and Expanded Section 179 Expensing for Hospitality & Restaurant Assets

The 2025 tax reform permanently restores 100% bonus depreciation for qualifying property placed in service on or after January 20, 2025, eliminating the phasedown schedule that had reduced bonus depreciation to 40% by this year. In addition, the IRC Section 179 expense cap increases to $2.5 million, with a phaseout beginning at $4 million. Both thresholds will be indexed for inflation starting in 2026.

Year	TCJA Provision Percentage	P.L. 119-21 Provisions Percentage
2025	40%	100% (if acquired after Jan. 19)
2026	20%	100%
2027 and later	0%	100%

Restaurants and hospitality businesses are among the most capital-intensive sectors in the economy. From kitchen equipment and refrigeration units to furnishings, signage and technology systems, operators must regularly invest in assets that wear out quickly or become outdated. These provisions allow businesses to immediately expense the full cost of qualifying assets in the year they are placed in service, rather than depreciating them over multiple years. This accelerates cost recovery, improves cash flow and enhances the after-tax return on capital investments.

When paired with cost segregation studies, operators can further break down building costs into shorter-lived components, such as lighting, flooring and specialty plumbing, that qualify for immediate expensing under bonus depreciation or Section 179. This layered approach can significantly reduce taxable income in the early years of a project or renovation.

For a deeper breakdown of how these provisions apply to restaurant and hospitality investments, read our full article on maximizing tax savings through accelerated depreciation.

How Bonus Depreciation and Section 179 Expensing Impacts Hospitality Businesses

Independent Operators and Franchisees: These businesses can accelerate deductions on new store buildouts, remodels and equipment upgrades, which frees up capital for marketing, staffing or expansion.
Hotel Owners and Operators: These stakeholders benefit from the full expensing of guest room furnishings, certain property improvements and back-of-house infrastructure, which is especially valuable for properties undergoing brand conversions or major renovations.
Multi-unit Groups and Management Companies: These organizations gain flexibility in capital planning across multiple locations, as the ability to expense large-scale investments in a single year supports more agile budgeting and reinvestment strategies.

2. Section 199A QBI Deduction Permanently Extended for Pass-through Businesses

The 20% Qualified Business Income (QBI) deduction under Section 199A has been made a permanent feature of the U.S. tax code. This provision allows eligible pass-through entities, including S corporations, partnerships and sole proprietorships, to deduct up to 20% of their qualified business income from their taxable income.

This change provides long-term tax relief and planning certainty for a wide range of businesses, particularly those in the restaurant, hospitality and service sectors, many of which operate as pass-through entities. By locking in this deduction, business owners can make more confident decisions around reinvestment, hiring and expansion without the looming uncertainty of expiration.

How the Section 199A QBI Deduction Impacts Restaurants and Hotels

Restaurant Groups and Hotel Management Firms: These businesses often operate on tight margins and rely heavily on predictable tax treatment. The permanence of the QBI deduction helps reduce their effective tax rates, freeing up capital for renovations, staffing and marketing initiatives.
Family-owned Businesses: With succession planning being a key concern, especially in multi-generational enterprises, the ability to forecast tax liabilities more accurately supports smoother transitions and estate planning strategies.
Professional Services Firms: While many service-based businesses face limitations under Section 199A, owners can still benefit from the deduction depending on income thresholds and business structure. This permanence allows firms to optimize their entity selection and compensation models.
Franchise Operators: Franchisees, particularly in food service and hospitality, can now factor this deduction into their long-term financial models, making franchise ownership more attractive and sustainable.

3. Section 163(j) Business Interest Deduction Limitation Continues for Capital-intensive Operators

The 30% limitation on business interest expense deductions under IRC Section 163(j) continues to apply under the new tax reform restricting the amount of deductible interest to 30% of adjusted taxable income (ATI). However, the calculation to determine the limit is more favorable under the 2025 tax reform.

The reform changes the determination of ATI which is calculated as earnings before interest and taxes (EBIT) through December 31, 2024, to earnings before interest, taxes, depreciation and amortization (EBITDA) thereafter. The revised calculation increases the amount of deductible interest expense creating significant tax benefits for capital-intensive sectors like hospitality, where debt is a common tool for growth and reinvestment.

How Section 163(j) Impacts Hospitality Operators and Real Estate Investors

Restaurant Chains and Franchisees: These businesses frequently engage in expansion and equipment upgrades, making them particularly vulnerable to the interest deduction cap under Section 163(j), so they should model the impact of 163(j) on their income tax bill and consider sale-leaseback arrangements to unlock capital without increasing debt.
Electing Real Property Trade or Business (RPTOB): Real estate businesses such as hotels may still elect out of Section 163(j) by agreeing to use the Alternative Depreciation System (ADS) for certain assets. However, this trade-off requires careful analysis, as it slows depreciation and may reduce the benefits of bonus depreciation or cost segregation.
Hotel Groups and Resort Operators: These businesses often carry substantial debt from property development and renovations, making them especially sensitive to Section 163(j) limitations. They should evaluate the potential impact on interest deductibility and consider restructuring financing to reduce reliance on traditional debt and preserve tax efficiency.
Family-owned Businesses: Because they may lack the scale to absorb disallowed interest deductions, they should incorporate Section 163(j) considerations into estate and succession planning and explore hybrid financing options that reduce interest exposure.
Private Equity-backed Operators: Given their typically high leverage post-acquisition, these businesses must align their financial models with Section 163(j) constraints and pursue strategies that enhance EBITDA, such as operational efficiencies or asset reclassification, to preserve interest deductibility.

4. Tip Income Deduction up to $25,000 for Tipped Hospitality Employees

The 2025 tax reform bill introduces a new federal deduction, for individuals that receive tipped income, of up to $25,000 per recipient annually. This provision applies to individuals who receive tips as part of their compensation and engage in an occupation where workers “customarily and regularly” receive tips. The IRS is expected to publish a list of eligible occupations in late 2025.

Qualified tips must be paid voluntarily and must be determined by the payor. The deduction phases out for single taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers) and is scheduled to expire in 2028.

For taxpayers to take the deduction, the payor must report the tips on Form W-2, Form 1099 or the recipient must report the tips on Form 4137. This change directly benefits tipped workers by increasing their after-tax income. Employee tips will continue to be subject to both social security and Medicare tax, and employers will still be eligible to claim the Federal Insurance Contributions Act (FICA) Tip Credit on tipped wages.

How the Tip Income Deduction Impacts Hospitality Employers and Employees

Full-service Restaurants: These establishments can leverage the deduction to attract and retain front-of-house staff such as servers and bartenders, who are often motivated by tip income, as the increased tax-free threshold may be a powerful tool for recruitment and may reduce turnover.
Hospitality Employers: Hotels, resorts and event venues that employ bellhops, valets, and other tipped staff may see improved morale and retention. Higher take-home pay makes tipped positions, like those in restaurants and hotels, more appealing to potential and current employees, potentially easing labor shortages.
Franchise Operators: Multi-unit operators in the food and beverage space can use this provision to standardize compensation strategies across locations, making it easier to scale hiring and retention efforts while maintaining compliance.
Family-owned Hospitality Businesses: Smaller operators who rely on close-knit teams may find this deduction particularly helpful in rewarding long-term employees and supporting succession planning by offering more competitive, tax-advantaged compensation.

5. Overtime Pay Deduction from Federal Income for Hourly Hospitality Workers

Under the new reform, individuals that receive overtime wages may deduct overtime pay that is required by the Fair Labor Standards Act (FLSA) and is reported on Form W-2 or Form 1099. Effective for the 2025 through 2028 tax years, individuals may now take a maximum annual qualifying overtime pay deduction of $12,500 ($25,000 for joint filers). This deduction phases out for single taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

In order for recipients to take this deduction, payors must file information forms with the IRS and provide statements to taxpayers showing the total qualified overtime compensation paid during the year. It is important for employers to ensure that overtime pay is tracked and reported to their payroll companies to properly file annual information returns. IRS guidance will be needed on this front.

The deduction offers meaningful financial relief to hourly employees who work extended shifts. This deduction applies to wages earned beyond the standard 40-hour workweek, specifically the portion that is in excess of the employee’s regular pay rate and is designed to support industries that rely heavily on flexible labor during peak periods.

The hospitality industry frequently depends on overtime labor to meet demand during high-traffic seasons, special events or staffing shortages. By allowing a deduction for overtime pay from federal taxable income, this provision increases after-tax pay for employees without requiring employers to raise base wages. It also provides a new incentive for employees to take on additional hours, helping businesses maintain service levels without overextending their labor budgets.

How the Overtime Pay Deduction Affects Hospitality Employers

Hotels and Resorts: These businesses can better manage labor costs during high-occupancy periods by offering tax-free overtime as a compelling incentive for staff to work longer shifts, especially in departments like housekeeping, front desk and food service.
Event Venues and Caterers: With staffing needs that fluctuate based on event size and timing, these operators gain greater flexibility in scheduling and can more easily scale up labor for large-scale functions without incurring additional tax-related payroll burdens.
Theme Parks and Seasonal Attractions: Operators that experience sharp seasonal spikes in attendance can use this deduction to encourage staff to work extended hours during peak months, improving guest experience while minimizing costs associated with hiring additional employees to cover peak hours.
Family-owned Hospitality Businesses: Smaller operators with lean teams can use this provision to reward loyal employees who step up during busy periods, helping to foster retention and reduce the need for temporary staffing.
Franchise Operators: Multi-unit owners can implement this deduction consistently across locations to standardize labor practices and improve employee satisfaction, particularly in quick-service and casual dining environments where overtime is common.

Other Key Provisions: Long-term Tax Planning for Hospitality and Restaurant Businesses

Beyond the headline incentives, the 2025 tax reform includes several provisions that offer long-term stability and strategic planning opportunities for hospitality and restaurant operators. These updates, some made permanent, others left unchanged, affect how businesses structure entities, manage losses, plan for succession and optimize tax efficiency across multi-unit operations.

Permanent Limitation of Excess Business Loss (EBL)

This limits how much business loss non-corporate taxpayers can use to offset other income, with the excess carried forward as a net operating loss. Hospitality businesses with seasonal or cyclical earnings should model the impact of this rule on long-term tax planning.

State-level Pass-through Entity (PTE) Taxes

The federal reform did not change state-level PTE tax regimes, these remain a critical planning tool for high-income owners of restaurant groups and hotel portfolios, especially in high-tax states.

Carried Interest

The final legislation left the carried interest rules unchanged. This allows hospitality-focused private equity sponsors and real estate investors to continue benefiting from long-term capital gains treatment, subject to existing holding period requirements.

Estate Tax Exemption Increase

Starting in 2026, the estate and gift tax exemption will rise to $15 million per individual (or $30 million per couple). This presents a significant opportunity for family-owned hospitality businesses to plan for ownership transitions, succession and long-term wealth preservation.

Tax Planning Strategies for the Restaurant and Hospitality Industry

Understanding the Consumer: Modify strategy based on changing customer needs due to shifts in economic landscape.
Negotiating with Vendors and Lenders: Seek better options for payment terms to alleviate restraints on cashflow.

Your Guide Forward

The 2025 tax reform introduces a mix of incentives and limitations that will reshape financial planning for the restaurant and hospitality industry. Operators should act quickly to align capital investments, entity structures and compensation strategies with the new rules.

To explore how these changes affect your business and to model tax-saving opportunities, reach out to your Cherry Bekaert professional. Our Tax Policy and Legislative Changes team is ready to help you navigate the new tax landscape with clarity and confidence.

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