1851 Extra: Dissecting the Tax Cut and Job Act’s Potential Effect on Franchising

Just hours after U.S. House of Representatives leadership introduced H.R. 1, the bill marking the first comprehensive set of federal tax reforms in more than three decades, franchising was already making its voice heard. The International Franchise Association (IFA) applauded the introduction of the bill, known as the Tax Cut and Jobs Act, and pledged to actively help shape its outcome.

“Today is a great day for the 733,000 franchise businesses and their 7.6 million employees nationwide,” said IFA President and CEO Robert Cresanti when the bill was introduced. “Few realize that behind the well-known name brands, there are small business owners that are struggling as a direct result of the expensive and complex U.S. tax code. Small businesses are the true engine of the U.S. economy, and when they prosper, the effects are felt throughout every sector. With a lower tax rate and a less complicated code like the House has proposed, small business owners will be more competitive, they’ll be more likely to expand, and, most importantly, they’ll hire more employees.”

In the days since the measure was filed, the IFA and other leaders across franchising have worked quickly to dissect its potential impact on the franchise model. To help plan for next steps in advocating for a positive impact for both franchisors and franchisees, large and small, the IFA hosted a conference call on November 6 that included U.S. House Ways & Means Committee Tax Counsel Victoria Glover, as well as franchise attorneys from Citrin Cooperman & Company, LLP and dozens of IFA member franchisors and franchisees. The group’s goal was simple: to provide initial clarity on the bill’s potential impact, particularly to multi-unit franchisees and franchisors, and to align on priorities to bring to Congressional leadership as debate over the legislation begins.  

“We are very pleased that tax reform is being tackled and the IFA is committed to pushing to create a positive outcome from it,” said Matt Haller, IFA Senior Vice President of Government Relations & Public Affairs in opening the call. “We are diligently speaking with our members, who have many varied interests, and we’re seeing many positive developments as well as some concerns to address as the bill is marked up.”

Initial modeling suggests H.R. 1 would have impact on both larger C-corporations, who can currently face double taxation at both the corporate level on net income and on shareholders when profits are distributed and on S-corporations, who are pass-through tax entities that pay no income tax at the corporate level, instead passing them through the business and reporting them on the owners’ personal tax returns. S-corps now make up approximately 75-80 percent of franchise businesses in the U.S.

Though first-run modeling data shows a higher potential reduction on C-corps and a smaller potential reduction on S-corps, a myriad of factors, including property ownership or leasing terms, can significantly influence the legislation’s ultimate impact. Experts also caution that the proposal is still likely to shift as the House Ways & Means committee marks up the bill and any final action isn’t likely for at least two months, or potentially longer. Below is the IFA’s latest timeline on potential adoption of new tax reform legislation.

As the initial debate over the proposal begins, all sides should agree: it is critical for the franchise community to clearly convey its top priorities and concerns to leaders in both the House and the Senate. With the House bill already in committee markup, lobbying attention has turned to Senate leadership, who are drafting language for the Senate’s version of the bill now.   

“Significant work remains to be done and an ambitious schedule awaits,” wrote Haller to IFA members in an email this week. “However, the appetite for tax reform is high, not just on Main Street, but also in Congress. With the help of IFA and similar business groups, tax relief for millions of Americans could become a reality soon.”