How Will the GOP Tax Plan Impact Restaurant Stocks and the Industry?

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This week, the final draft of the GOP tax plan was passed in the Senate and the House version is already waiting to be signed into law by President Donald Trump.

One of the biggest changes, if not the biggest, from the current tax plan is that the corporate tax rate will be changed to 21% from the current 35%.  

This has evidently already had an impact on restaurant stocks, including Shake Shack and Yum! Brands., as investors are anticipating that this drastic tax rate cut will lead to a spike in profits. 

Darden Restaurants, in particular, saw a massive surge this week. On Tuesday, the company's stock spiked by 6.7% after the company announced its quarterly results. 

"Our strong same-restaurant sales and new restaurant growth drove continued market share gains during the quarter. That performance, in addition to our solid earnings growth, is a result of executing on our strategy. Our teams are building guest loyalty at all of our brands through their constant focus on our back-to-basics operating philosophy, which is grounded in food, service and atmosphere," said Darden CEO Gene Lee.

Darden's stock spiked even more on Wednesday morning after the GOP tax bill passed in the Senate late Tuesday night. 

Besides generating growth for big companies due to the cut in income taxes, the tax plan will lessen the burden for families who have to paid a massive estate tax. 

Estate taxes will be 40% on estates over $11.2 million per individual, versus the current $5.6 million. These taxes, often referred to as the "death tax," made it difficult for family businesses to keep it in the family because of the 40% tax that had to be paid to inherit the business. 

However, small businesses like independent restaurants and smaller chains are not going to see an equal tax treatment that will be provided to big corporations.

There will be some tax relief for this group though. 

Business owners with an income under $315,000 will get a 20% deduction for pass-through income, versus currently, where a business taxes are based on the individual’s income tax rate.

"Some owners were taxed at individual rates as high as 39.6 percent while corporations had lower rates. But some researchers including those at the Urban Institute, a think tank based in Washington, D.C., say upward of 85 percent of owners of sole proprietorships, partnerships and S corporations are currently taxed at rates well below the top brackets," writes "INC." "The agreement increases what's known as the Section 179 deduction that lets companies write off many types of equipment purchases up front rather than depreciate them over a period of years. Companies would be able to deduct $1 million in purchases, up from the current level of $510,000. Companies use the deduction to help finance the purchase of equipment ranging from computers and office chairs to vehicles and manufacturing machinery."

From a consumer standpoint, Republicans argue that the cut in individual income-tax rates and the increase in the child care credit will stimulate economic growth because Americans will have more disposable income to spend. 

This could lead to a surge in consumer restaurant spending, but only time will tell. 

In early October, the National Restaurant Association (NRA) gave "kudos" to the Trump administration for the initial tax plan drafts. 

“The National Restaurant Association applauds the tax reform framework,” said Cicely Simpson, our executive vice president of public affairs at NRA. “We look forward to engaging with the President and Congress as the negotiations regarding tax reform continue.” 

Do you think this tax plan will stimulate economy growth, especially in the restaurant industry?