Key points covered in this article:

  • The OBBBA introduces significant tax benefits for restaurants and hotels, including 100% bonus depreciation, expanded Section 179 expensing, and a permanent 20% QBI deduction for pass-through entities.
  • Temporary provisions like “no tax on tips” and “no tax on overtime” offer additional savings for employees in the hospitality industry from 2025 to 2028.
  • Businesses should act now to maximize these benefits, plan for energy efficiency credits before their 2026 sunset, and adjust strategies to align with the new tax landscape.

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, is the biggest tax law change since the Tax Cuts and Jobs Act back in 2017. It runs more than 500 pages and includes over 100 provisions, with an overall price tag of $4.5 trillion in tax cuts over the next ten years. For restaurants and hotels, there are major tax benefits worth reviewing before year-end.

Business owners across industries stand to benefit from permanent tax breaks, larger deductions, and other incentives that may improve cash flow. For those in the hospitality industry, the savings could be substantial, depending on the situation. Some provisions will apply immediately, and others will take proactive planning. In any case, now is the time to review the details and prepare to take full advantage.

Major Tax Benefits for Restaurants and Hotels

100% Bonus Depreciation

The restoration of 100% bonus depreciation is perhaps the single most valuable provision for capital-intensive hospitality businesses. Unlike the temporary nature of previous bonus depreciation rules, this benefit is now permanent for property acquired after January 19, 2025.

For hotels and restaurants making improvements, that means there are huge opportunities for immediate tax savings. For example, in 2024 bonus depreciation was available at 60%, and in the very first weeks of 2025, it dropped to 40%. While still a meaningful benefit, the difference with 100% bonus depreciation on large property investments may add up to hundreds of thousands of dollars in immediate cash flow.

Section 179 Expensing

The Section 179 limit is now $2.5 million and the new phase-out threshold is $4 million. This is a big win for smaller restaurants and hotels that regularly buy equipment, furniture, and vehicles. Instead of depreciating those purchases over several years, this provision allows owners to expense them all at once. And the increased threshold likely means that more businesses are going to be able to claim the benefit in the coming years.

Business Interest Expensing

OBBBA changes the rules for how business interest is deducted. Section 163(j) now uses EBITDA instead of EBIT, which means depreciation and amortization are added back to the calculation. This allows for larger deductions and makes it easier to fully expense interest costs. Bigger restaurant groups and hotel chains that depend on financing for growth and daily operations are expected to see the most benefit.

Immediate Expensing of Domestic R&D (Section 174)

Starting in 2025, restaurants and hotels can fully deduct domestic research and development (R&D) costs instead of spreading them out over five years. OBBBA also allows small businesses with less than $31 million in sales to apply this change retroactively to 2022–2024. A business may qualify for this deduction if there’s detailed documentation of a process improvement or investments in the development of certain technology that helps the business.

Qualified Business Income (QBI) 

The 20% QBI deduction under Section 199A is permanent for pass-through entities. This deduction was meant to expire at the end of 2025, but now, restaurants and hotels structured as S corporations, partnerships, or LLCs have some certainty in tax planning.

Other Key Items Impacting Businesses

Increased 1099 Reporting Threshold

Starting in 2026, the reporting threshold for Form 1099 rises from $600 to $2,000 (indexed for inflation). This lessens the administrative burden for small businesses.

PTET

State-level PTET (pass-through entity taxes) elections are still available for pass-through businesses. This is best described as a state-level workaround to the federal SALT cap limitations, allowing pass-through entities to deduct state taxes paid at the entity level on their federal returns while providing credits to individual owners on their state returns.

Expanded FICA Tip Credit

The FICA tip credit has been available since 1994. OBBBA expanded it to include personal beauty services (barbering, nail salons, spa treatments). Hotel spas and other hospitality entities are likely to see the greatest benefit.

Employee Retention Credit (ERC)

OBBBA disallowed claims for Q3 and Q4 of 2021 if they were filed after January 31, 2024, and the IRS review period has been extended to six years. Businesses will want to keep proper documentation in case the IRS questions existing claims.

Corporate Charitable Contribution Limits

Starting in 2026, corporations will face a 1% contribution floor. Charitable contributions below the floor are not deductible. The 10% ceiling on taxable income for charitable deductions is still in place, and excess contributions above the ceiling can still be carried forward.

For an example on the new floor, let’s say a corporation has $500,000 in taxable income; their 1% floor would be $5,000. Then, they donate $4,000 to various charities. Because the donation falls below the floor, none of it would be deductible.

Section 179D Sunset

Section 179D, also known as the energy-efficient commercial building credit, will now phase out on June 30, 2026. This applies to new construction, retrofits, and upgrades. Hotels and restaurants planning energy efficiency improvements may want to review the timeline to capture this credit.

Employee-Related Benefits

No Tax on Tips

From 2025 through 2028, certain tipped workers can exclude up to $25,000 of tip income from federal income tax. The IRS has identified 68 eligible occupations, with food service, entertainment, and hospitality at the top of the list. To qualify, workers must earn less than $150,000 annually ($300,000 for joint filers).

Only voluntary customer tips qualify. Mandatory service charges like automatic gratuity for large parties do not qualify. Employers may want to review tipping procedures to see that employees can take advantage of the deduction. Tips must still be reported to the employer and included on the employee’s W-2. Payroll taxes still apply.

No Tax on Overtime

OBBBA introduced another temporary provision that will run from 2025 through 2028. Employees can deduct up to $12,500 ($25,000 for MFJ) in qualified overtime compensation.

Looking Ahead

With many changes taking effect, restaurants and hotels will want to begin planning now rather than waiting for the 2026 tax season. Key questions to discuss with an advisor include:

  • How can the business maximize the benefits of 100% bonus depreciation for property improvements and equipment purchases?
  • Should the business transition from a mandatory service charge to a voluntary tipping option to allow employees to benefit from “no tax on tips”?
  • Will state laws conform to OBBBA? What impact does that have on planning?

This bill creates an opportunity for restaurants and hotels to review their tax strategies this year. But before making any major decisions, consult with your advisor as each situation is unique. For more information on how OBBBA impacts your hotel or restaurant, contact PBMares Tax Partner Charles Dean Smith, Jr.

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