Month: March 2025

Revenue Ruling 2023-02: Updated Tax Consequences of Gifting Your Estate

In 2023, the IRS issued Revenue Ruling 2023-02, significantly impacting the transference of assets held in irrevocable trusts. If you are the owner of an irrevocable trust—or are planning to set up an irrevocable trust—you should meet with your accountant to assess the impact of this rule change on your estate plan.

What are the tax benefits of trusts?

There are two basic types of trusts used to transfer assets to beneficiaries: revocable and irrevocable. Revocable trusts can be changed or revoked after they are created; the assets in a revocable trust remain a part of the grantor’s estate and are therefore subject to estate taxes. With few exceptions, irrevocable trusts cannot be changed or revoked. Depending upon the verbiage in an irrevocable trust agreement, transfers to the trust may be considered completed gifts; as such, they are not included in the grantor’s estate and are therefore exempt from estate taxes. If, by the terms of the trust, the grantor maintains the right to determine the beneficiaries and the beneficial enjoyment of the trust assets, the grantor may be deemed not to have made completed gifts when the assets were transferred to the trust. If this is the case, when the grantor passes away, the trust assets will be included in the grantor’s estate and may be subject to estate taxes. An irrevocable trust can be a useful component of a person’s estate plan and long-term tax strategy; however, careful consideration must be given to the terms of the trust agreement.

Up until 2023, assets in revocable trusts and many irrevocable trusts benefited from a provision known as the “step-up in basis” upon the death of the grantor. Under the step-up in basis provision, when the grantor dies, the tax basis (the price originally paid) of a trust’s assets “steps up” to the fair market value at the time of the grantor’s death. What is the significance of this? The step-up in basis provision greatly reduces or eliminates capital gains taxes for the trust’s beneficiary, as he/she is only required to pay taxes on the increase in value of the trust’s assets occurring after the original owner’s death, not the increase in value occurring during the lifetime of the owner.

What changed with Revenue Ruling 2023-02?

With the issuance of Revenue Ruling 2023-02, however, the IRS clarified that any assets held in an irrevocable trust that are not included in the owner’s taxable estate do NOT qualify for a step-up in basis. In other words, an irrevocable trust that excludes the trust assets from an individual’s estate can no longer reap the dual benefits of an estate tax exemption and a step-up in basis. This change, of course, may have significant tax implications for grantors of irrevocable trusts and their beneficiaries.

Assets in many more irrevocable trusts now maintain a carryover basis, as opposed to a stepped-up basis, meaning the assets retain the tax basis of the original owner. Therefore, the capital gains of the gifted assets are calculated using the original tax basis, resulting in higher capital gains taxes for the beneficiary.

This change will begin to impact more people starting in 2026, when the current high exemption threshold for estate taxes ($13.99 million in 2025) is due to sunset. On January 1, 2026, if no actions are taken to change the law, the exemption threshold will reset to approximately $7 million, meaning many more families and individuals will be subject to estate taxes after that point.

Is it time to review your estate plan?

Whether an irrevocable trust remains a tax-beneficial option for transferring your estate depends largely on your individual circumstances. It is important to carefully weigh the tax advantages and disadvantages of the provisions of irrevocable trust agreements with the help of an experienced financial professional.

At RBT CPAs, our Gift, Estate, and Tax practice professionals help clients define their financial goals, understand and weigh their options, and develop an estate plan. We can review legal documents, such as trust agreements, to ensure they are tax-beneficial and aligned with your goals. We are available to meet with you annually to review your estate plan, ensuring it’s on track to reflect your wishes and is adapted to address any tax law changes, such as the ruling discussed in this article.

To learn more about how we can be Remarkably Better Together, please don’t hesitate to give us a call today.

Tax Credits Available to Manufacturers in New York

As a manufacturer in New York State, you may be able to receive tax credits for purchasing new equipment, creating new jobs, utilizing property for manufacturing, investing in research and development, participating in the Excelsior Jobs Program, and more. Tax credits can directly reduce the taxes you owe and, in some cases, produce a refund. In the spirit of tax season, let’s take a look at some of the tax credits available to manufacturers in New York.

Investment Tax Credit (ITC) and Employment Incentive Credit (EIC)

Businesses in New York that make investments in machinery, buildings, or equipment are eligible to receive the Investment Tax Credit. The standard rate of credit for C corporations is 5% on the first $350 million invested, and 4% for any amount over $350 million. The credit for S corporations, partnerships, and sole proprietorships is a flat 4% rate. Any unused credit can be carried forward 15 years for C corporations, or 10 years for S corporations, partnerships, and sole proprietorships. A corporation that qualifies as a new business can elect to receive a refund for unused credit rather than carrying it forward. If your investment in qualifying property creates additional jobs, your business may also be eligible for an Employment Incentive Credit (EIC) for the two years succeeding the investment. To qualify for the Employment Incentive Credit, you must (1) qualify for the Investment Tax Credit and (2) increase your average number of employees by at least 101% of the average number of employees during the employment base year (the year immediately preceding the ITC year).

Manufacturer’s Real Property Tax Credit

You may be eligible to receive a credit equal to 20% of the real property taxes paid during the tax year on your New York State business property. To qualify, you must use your property principally for manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing. For more information about eligibility requirements, see Manufacturer’s Real Property Tax Credit.

R&D Tax Credits

Planning to research new technologies or develop a new product? New York manufacturers may be eligible for both federal and state credits for research and development (R&D) activities. The federal R&D Tax Credit offers a dollar-for-dollar reduction in taxable income for qualifying expenses. This credit is available to U.S. businesses for qualifying research activities like software development, testing new technologies, product enhancements, and more. Qualified small businesses can use the R&D credit to offset quarterly payroll taxes up to $500,000. New York State offers a separate R&D tax credit to businesses participating in the Excelsior Jobs Program. The Excelsior Research and Development Tax Credit equals 50% of the business’s federal R&D credit related to R&D expenses in New York State, up to 6% of research expenses based in NYS (8% for a qualified green project or green CHIPS project).

Excelsior Jobs Program Tax Credit

If your business participates in the Excelsior Jobs Program, you may be eligible to receive the Excelsior Jobs Program Tax Credit, equal to the sum of five components:

- Excelsior Jobs Tax Credit (up to 6.85% of wages per net new job; up to 7.5% for green project or green CHIPS project)
- Excelsior Investment Tax Credit (2% of qualified investments; up to 5% for green project or green CHIPS project)
- Excelsior Research and Development Tax Credit (50% of federal R&D credit related to R&D expenses in New York State, up to 6% of research expenses based in NYS or 8% for green project or green CHIPS project)
- Excelsior Real Property Tax Credit (available to businesses located in certain distressed areas or qualified as Regionally Significant Projects)
- Excelsior Child Care Services Tax Credit (up to 6% of net new childcare services expenditures)

For more information about the tax credits included under the Excelsior Jobs Program, visit Empire State Development.

Have questions?

Understanding the various tax credits available to New York manufacturers can be a confusing process. That’s where we can help. RBT CPAs’ tax and accounting professionals are here to help you understand and claim credits for your business, allowing you to make the most of tax-saving opportunities in our state. Learn more by speaking with one of our experts today.

Planning Ahead: The Importance of Succession Plans and Buy-Sell Agreements

As a construction business owner, you’re on top of your project plans—but what about your succession plan? A comprehensive succession plan is a critical part of any company’s business strategy, helping to ensure the continued success of your business even after you leave your role as owner.

Why You Need a Comprehensive Succession Plan

A succession plan isn’t merely a piece of paper stating your chosen successor(s). A well-structured succession plan takes several years to develop and may change over time depending on the needs of your business and its stakeholders. It’s never too early to get started on a succession plan. You should begin planning for future transitions long before you expect to retire or leave your position. Life is unpredictable, and you never know when circumstances may demand a change of leadership. In the case of an unexpected event such as illness, injury, or even death, you’ll want to ensure that the management of your business is left in good hands.

When building your succession plan, consider what positions are critical to the operation of your business and identify high-potential employees as possible candidates for succession. A vital factor in developing future leaders within your company is a culture of constant training and mentorship. It is in your best interest to provide frequent, high-quality training opportunities and conduct regular performance reviews of your employees. Experienced construction professionals possess a wealth of hands-on experience, industry knowledge, and valuable skills. Mentorship programs ensure that this knowledge is passed down to the next generation of workers, rather than being lost when experienced employees leave or retire.

Not only does a detailed succession plan provide a blueprint for the future of your company, but it also earns the confidence of your employees, investors, clients, and other stakeholders by assuring them that a plan is in place for the inevitable transition of leadership. As such, it’s advisable to communicate your plan, as well as any changes or updates, to company stakeholders. The plan should be regularly reviewed and adjusted if necessary to ensure alignment with the business’s current goals and needs.

The Benefits of Buy-Sell Agreements

One question that you will face when developing a succession plan is how company ownership will be transferred when the time comes. One option for transferring ownership is through a buy-sell agreement. Buy-sell agreements are typically implemented by companies with multiple owners to guarantee business continuity in the event that one owner leaves the business for reasons such as retirement, voluntary exit, disability, or death. Buy-sell agreements help to protect the business by allowing a smooth transition of ownership, preventing owners from selling interests to outside parties, providing a method for assessing the value of company interests, and avoiding tax consequences of transferring ownership.

There are two main types of buy-sell agreements: cross-purchase agreements and entity-purchase (redemption) agreements. Under a cross-purchase agreement, the interests of the departing owner are purchased by the remaining owners. In the event of an owner’s death, tax-free life insurance policies (taken out by all owners on each other) are often used to fund this purchase. Under an entity-purchase agreement, the business entity itself purchases the interests of the departing owner, also commonly using tax-free life insurance benefits to fund the purchase. The establishment of buy-sell agreements is merely one component of a comprehensive business succession plan.

Set Your Business Up for Success

Investing the time and effort to formulate a succession plan early on reduces the risk of disruption and difficulties for your business down the road. It’s important to work with a team of trusted advisors throughout this process to ensure the long-term success of your succession plan and your business. RBT CPAs’ business advisory services experts are available to assist you with creating and reviewing your succession plan and buy-sell agreement. We are also here to support all of your accounting, tax, and audit needs. For more information, don’t hesitate to give us a call and find out how we can be Remarkably Better Together.

To Merge or Not to Merge: New York State Offering Increased Aid to Consolidating School Districts

As of July 2024, school districts in New York State that reorganize—or merge—are eligible for financial assistance of up to 40 percent of the Total Foundation Aid Base under the Reorganization Incentive Operating Aid (RIOA) program. Unfrozen in the 2024-2025 state budget, RIOA is available to reorganized school districts for up to 14 years after merging, on a phase-out basis. New York State encourages consolidation for districts with small student populations as a solution to issues caused by low enrollment. Several districts in the state have already made the decision to merge, and more are considering the possibility.

The potential benefits of merging districts include cost savings, additional resources, expanded offerings for students, and upgraded facilities. However, many smaller districts are reluctant to merge due to concerns over loss of school identity, less individualized student attention, increased travel time, the potential for higher property taxes, and other possible consequences. In-depth studies evaluating the prospective benefits versus costs for school districts considering reorganization are necessary to determine the feasibility of potential mergers.

Potential Benefits of Merging

Cost Savings

Merging districts can result in reduced administrative and operational costs. Consolidating districts reduces the number of teachers and administrative staff required to operate the district, and fewer school buildings means less spending on utilities such as heat and electricity. Consolidating bussing systems can also help reduce transportation costs.

Additional Resources

A reorganized district benefits from the combined resources of both districts involved in the merger, including teaching staff, learning materials, and school equipment.

Expanded Programs

The funding provided through the RIOA program allows reorganized districts to develop and strengthen both academic and extracurricular programs. The new, larger districts may be able to hire more specialized instructors and offer a wider variety of educational programs. The funds can also be used to support non-academic programs such as athletics, clubs, and theater and music programs.

Facility Upgrades

RIOA funds can also be utilized to improve or renovate school buildings and grounds.

Concerns over Merging

Loss of School Identity

Communities faced with the possibility of a school district merger often fear that combining districts will lead to a loss of school identity. People may be reluctant to give up familiar school traditions, mascots, and the tight-knit communities they’ve become accustomed to.

Less Individualized Student Attention

Students, employees, and families in smaller school districts are accustomed to the personal qualities of a small school community, such as small class sizes, opportunities for parent involvement, easy access to teachers, and individualized student attention. A transition to a larger combined district may translate to a less personalized experience for students and families.

Longer Travel Time

When a merger occurs, students may need to travel further distances to school, increasing travel time and transportation costs.

Potential Increased Costs for Taxpayers

When two school districts merge, the new district may level up staff salaries and benefits to those of the higher-paying district, raising staffing costs. These higher staffing costs may result in higher property taxes for residents. Increased school transportation costs can also lead to higher taxes.

School district mergers present both potential advantages and disadvantages for communities in New York State, all of which should be considered by districts exploring the possibility of reorganizing. Merger feasibility studies should be conducted in order to thoroughly weigh the potential benefits versus costs for individual communities. For more information on school district reorganization, see NYSED’s Guide to the Reorganization of School Districts in New York State.

While you continue to act in the best interest of your school district, please know that RBT CPAs is here to support your district’s accounting, advisory, tax, and audit needs. Contact us to find out how we can be Remarkably Better Together.

How Do You Know If You Have a Good Fee Accountant?

A fee accountant is an external accountant hired by a Public Housing Authority on a contractual basis to handle the organization’s accounting responsibilities. The use of a fee accountant can improve the accuracy and efficiency of an Authority’s financial reporting, give the Authority access to specialized knowledge, and save the organization the expense of an in-house accounting team. But—not all fee accountants are created equal.

Below are some signs of a good fee accountant.

Minimal (or zero) audit adjustments

One sign that your fee accountant is doing his/her job well is a lack of adjustments, posted or unposted, to the Authority’s audited financials. This indicates that the Authority’s financial data has been reported accurately and in compliance with regulations.

Minimal errors in monthly financial reports

Another indicator of a good fee accountant is a lack of errors in the financial statements he/she prepares each month for the Board of Commissioners. Monthly financial reports are key to monitoring a PHA’s financial health; they should be accurate and submitted in a timely manner.

Ability to meet deadlines and communicate about delays

Fee accountants need to meet several key deadlines including those regarding budget reports, monthly financial reports, and Financial Data Schedules. If delays occur, the accountant should communicate this information to the PHA.

Understanding of HUD programs and compliance requirements

A good fee accountant understands the specific compliance requirements for HUD programs and keeps abreast of updates in industry regulations.

Experience with PHA software programs

Your fee accountant should be familiar with the common software programs used in the management of Public Housing Authorities, such as MRI Software, Yardi, and PHA-Web.

Audit preparation and readiness

Your fee accountant should have experience working with auditors and must be able to provide accurate supporting documentation to auditors in a timely manner. A fee accountant must ensure that the PHA’s books and records are audit-ready, meaning that all supporting documentation should reconcile to the trial balance before the auditor’s review. The auditor’s role is to verify accuracy, not to make adjustments. Any necessary corrections should be identified and addressed before the audit begins to ensure a smooth and efficient audit process.

Communication and responsiveness

Is your fee accountant accessible and responsive when you reach out with questions or concerns? A good fee accountant maintains consistent communication with the Housing Authority as well as with auditors.

Willingness and ability to help the Authority resolve issues

Finally, your fee accountant should be a helpful resource, identifying potential issues and opportunities in the PHA’s financial processes. A good fee accountant is committed to helping the PHA resolve deficiencies and other issues that arise.

As you can see, there is much more to the fee accountant role than merely completing accounting tasks. When it comes to accounting services, quality of service matters. Essential to maintaining the financial reputation and integrity of your PHA is a fee accountant who is reliable, effective, and well-versed in the specific requirements for HUD programs.

Our experts at RBT CPAs possess the specialized knowledge and skills to work with you on a per-service basis alongside your internal accounting resources or as your full-service accounting and tax department and advisor. When you partner with RBT CPAs, you can be confident in your program’s financial integrity and compliance, so you can continue to focus on your goal of providing decent and safe housing for our state’s residents. To learn more about how we can support your accounting, tax, audit, and advisory needs, visit our website or give us a call.

3 Tax-Saving Opportunities for New York Breweries and Distilleries

Is your business making the most of tax benefits this year? As annual tax deadlines approach, consider the following credits and deductions available to breweries and distilleries in New York State.

Section 179 and Bonus Depreciation

Section 179 allows business owners to deduct the full cost of tangible property placed into service during the tax year. Eligible property includes machinery, equipment, certain vehicles, computers, software, and more. For a full list of eligible property, see IRS publication 946. For tax years beginning in 2024, the maximum expense deduction businesses can take is $1,220,000. This limit decreases when more than $3,050,000 worth of Section 179 property is placed into service during the tax year.

Bonus depreciation is another immediate expense deduction available to brewers and distillers. Bonus depreciation allows business owners to deduct a percentage of the cost of newly acquired property. The bonus depreciation rate for 2024 is 60 percent for certain qualified property. Note: Beginning in 2022, bonus depreciation percentages began decreasing as the incentive started phasing out. The rate will continue to go down by 20 percent each year until 2027 when the phase-out will be complete.

Combining Section 179 and bonus depreciation can result in significant tax savings for business owners. If you plan to utilize both benefits, keep in mind that Section 179 must be applied first.

Alcoholic Beverage Production Tax Credit

Registered distributors who produce beer, cider, wine, or liquor in New York are eligible for the Alcoholic Beverage Production Tax Credit if, during the tax year, they produced a maximum of 60 million gallons of beer or cider; 20 million gallons of wine; or 800,000 gallons of liquor.

For the first 500,000 gallons produced in the state, the tax credit equals:

14 cents per gallon of beer or cider
30 cents per gallon of wine
$2.54 per gallon of liquor with alcohol by volume (ABV) between 2% and 24%
$6.44 per gallon of liquor with an ABV above 24%

For amounts in excess of 500,000 gallons, the credit equals 4.5 cents per gallon up to 15 million additional gallons of beer, cider, or wine and up to 300,000 additional gallons of liquor. During an audit, you may be required to prove entitlement to the tax credit by providing copies of various forms (click here for a list.)

Please note that this credit is taxable. For more information, check out our article on the taxability of the NYS Alcohol Production Tax Credit.

Tipped Employee Credits

FICA Tip Credit

If you employ food and beverage service workers who customarily earn tips and you pay Social Security and Medicare taxes on those tips, you may be eligible to credit a portion of what you pay against your business income taxes. Recordkeeping requirements apply.

New York Tip Credit

If you employ food and beverage service workers who earn at least $30 a month in tips, a portion of those tips may be used to satisfy your minimum wage obligation. When taking this credit, recordkeeping and reporting requirements apply. More information on the NYS Tip Credit can be found here.

Conclusion

Don’t miss out on opportunities to maximize your tax benefits this year. These credits and deductions can save you money on taxes, and capital which can then be used to reinvest in your business. For more information on tax benefits available to your business, contact our experts at RBT CPAs. Our firm is here to support your business’s accounting, advisory, tax, and audit needs. Give us a call today to find out how we can be Remarkably Better Together.

Is Your Municipality Audit-ready?

Financial statement audits are crucial to any organization’s financial health, and government entities are no exception. A financial statement audit provides an independent assessment of an organization’s financial statements, which in turn ensures transparency, accountability, and a strong foundation for future planning. Preparation is key to ensuring a smooth audit process and avoiding delays. Here are some ways municipalities can prepare for a financial statement audit.

Create an audit committee.

An audit committee, made up of members of the governing body, oversees the audit process. The committee acts as the primary point of contact between the auditor, the governing board, and the appropriate staff or departments. The committee also reviews audit findings and assists in recommendations for improvement. The Government Finance Officers Association (GFOA) makes certain recommendations for the establishment of audit committees, which can be found under the “Best Practices” section of their website.

Know the regulations and requirements.

The audit committee should be familiar with the various regulations governing financial reporting for municipalities. The Generally Accepted Accounting Principles (GAAP) and Governmental Accounting Standards Board (GASB) guidelines lay out the rules for financial reporting for government entities. This guidance is frequently updated, so municipalities must stay up to date with the latest updates and revisions to these standards.

Understand the audit process.

The audit committee should understand the scope of the audit (what will be assessed), the timeline, and the roles and responsibilities of everyone involved. The audit committee should also understand that audit-ready means that all supporting documentation should reconcile to the trial balance before the auditor’s review. The auditor’s role is to verify accuracy, not to make adjustments. Any necessary corrections should be identified and addressed before the audit begins to ensure a smooth and efficient process.

Gather all necessary documentation.

The municipality must request, collect, and organize documentation and information from the appropriate departments and staff, per the audit requirements. This includes general ledgers, detailed schedules of account balances, bank statements, invoices, receipts, payroll records, purchase orders, contracts, and other financial documents. The documentation should be easily accessible for the auditor, and all financial records should be reviewed for accuracy prior to an audit.

Review internal controls.

Regular internal control assessments help to strengthen the mechanisms for preventing fraud and abuse within an organization. Internal controls include procedures for authorization, record keeping, reconciliations, and auditing. These processes must be periodically reviewed to ensure that they are achieving their objectives in preventing risk to the municipality.

Review prior year’s audit findings.

Ensure that corrective actions have been taken for any deficiencies identified in the prior year’s audit. This will not only reduce the likelihood of repeated findings but also demonstrate your commitment to improving your financial management practices.

Communicate with your auditor and prepare for questions.

It’s important to keep an open line of communication with your auditor, maintaining transparency throughout the audit process. Make sure you disclose any changes to your financial systems or operations. Be prepared to answer questions regarding your municipality’s financial procedures and processes, internal controls, documentation, operations, and personnel.

A financial statement audit can be a daunting and sometimes stressful event, but through preparation, the opportunity for error and disorganization can be reduced. Municipalities can follow the guidelines above to ensure the audit process runs as smoothly and efficiently as possible. If you have any questions about the audit process for municipalities—or if you need any other audit, accounting, tax, or advisory support, please know RBT CPAs is here for you. We’ve been proudly serving municipalities, businesses, non-profits, and individuals in the Hudson Valley for over 50 years. Please don’t hesitate to give us a call and find out how we can be Remarkably Better Together.

The Importance of Internal Control Assessments

Internal controls are mechanisms that help to ensure an organization’s financial integrity. Unions rely on these internal controls to minimize financial risk, prevent fraud, and maintain the accuracy of financial records. It is crucial that these processes are regularly assessed in order to maintain their effectiveness.

What are Internal Controls?

Internal financial controls are processes designed to help prevent fraud, enhance reliability of financial statements, reduce the risk of unexpected financial losses, and ensure compliance with laws and regulations. Internal controls include procedures for authorization, record keeping, reconciliations, and auditing.

Why Do Unions Need Internal Controls?

Strong internal controls serve the following purposes for unions: they protect union funds, safeguard the union’s reputation, promote transparency, provide data for decision-making, and instill member trust.

Union officials are responsible for ensuring that union funds are used solely for the benefit of the union and its members. To ensure the proper use of funds, union leadership must maintain well-monitored systems for the following financial processes:

Collecting member dues
Managing union funds
Forming budgets
Keeping financial records
Providing financial reports to members
Conducting internal audits
Managing union bank accounts and credit cards

Preventing fraud, corruption, and financial risk is key to maintaining the reputation and integrity of any organization. The U.S. Department of Labor discusses several safeguards for preventing abuse in unions including:

Division of financial duties amongst multiple individuals
Issuing of records and receipts to members for dues paid
Maintenance of records and receipts for all union income and expenses
Transparency regarding union officer salaries and allowances
Cosigning of all checks from the union’s bank account
Full reports of union finances given by the financial officer at each membership or executive board meeting
Prior authorization for large or unusual transactions
Internal audit committees (or trustees)
Regular audits of the union’s financial records

Assessing Your Union’s Internal Controls

Regularly evaluating your union’s internal controls is a critical step for minimizing financial risk. Weaknesses in internal controls can develop if union officials misunderstand the guidelines or if the guidelines are not updated to match changing regulatory requirements. All of the mechanisms discussed above must be periodically reviewed to ensure that they are achieving their objectives in preventing risk to the union.

Reviewing internal controls may involve the use of risk assessments, which identify potential threats and weaknesses in the operations of the organization. Audits of financial records can also help to identify gaps in compliance. If weaknesses are found, then operating procedures can be amended accordingly.

It is critical to stay on top of your union’s financial health to reduce the risk of reputational and operational damage.

Looking to test your union’s internal control processes? RBT CPAs’ experts are happy to provide internal control assessments for your union. At RBT CPAs, we understand the unique compliance and regulatory environment that you operate within. Our firm has been serving organizations in the Hudson Valley and beyond for over 50 years. You can count on RBT CPAs’ professionals to help maintain your union’s reputation for transparency, accountability, and trustworthiness by providing exceptional accounting, advisory, audit, and tax services.

For more information about how our firm can help to maintain the financial health of your union, visit our website or give us a call.

How the New Tariffs Will Impact the Restaurant Industry—and What Restaurants Can Do to Prepare

It’s no secret that costs are rising for just about every industry these days. The restaurant industry in particular is facing increasing financial pressure due to a variety of factors. The recent bird flu outbreak has led to shortages of egg and chicken supplies, causing a steep rise in prices for these products. New York restaurant owners are also dealing with higher labor costs due to the increase in New York State minimum wage rates as of January 1.

U.S. restaurants now face an added challenge as the country’s economic policies rapidly change under the new administration: additional tariffs on imported goods. The newly imposed tariffs will likely affect the restaurant industry in significant ways. However, there are measures restaurants can take to adapt their business to the changing economic landscape and remain resilient in the face of increasing logistical challenges.

What Tariffs Have Been Announced?

So far this year, the U.S. has announced tariffs on goods imported from Canada, Mexico, and China. China and Canada have responded with retaliatory tariffs of their own; Mexico has announced plans to do the same. Tariffs on goods from the European Union are expected to be announced soon. The U.S. has also reinstated a 25 percent tariff on steel imports and increased the tariff on aluminum imports to 25 percent.

How Will Restaurants Be Impacted by Tariffs?

Higher costs for imported foods:

Restaurants can expect to face higher costs for imported food products. This includes produce from Mexico (a significant supplier of produce for the United States), and other imported foods such as olive oil, cheese, seafood, coffee, spices, beer, wine, and spirits. Additionally, any foods or beverages packaged in aluminum cans will likely be affected by the higher aluminum tariffs.

Higher costs for non-food products:

Restaurants may also see increased costs for other non-food products and materials. Kitchen equipment, furniture, and construction materials (i.e., lumber from Canada and steel) are some of the categories that may be impacted.

Supply chain disruptions:

Supply chain issues caused by tariffs could lead to delayed shipments or supply shortages.

Changes in consumer behavior:

During periods of economic uncertainty, consumers tend to reduce discretionary spending. Since eating out at restaurants is typically considered a luxury, this may be one of the areas in which people decide to cut back.

What Can Restaurants Do to Counter the Impact of Tariffs?

Reassess your sourcing:

Determine the country of origin of the ingredients and products you currently use. Look at your sources and assess which ones will be affected by current and potential tariffs. Diversifying your suppliers will help to improve supply chain resilience. Another option is to negotiate with suppliers to arrange deals on bulk orders or long-term contracts. You may want to explore alternative sourcing options—either domestic or in regions not affected by tariffs. Consider a move towards local sourcing, leaning into consumers’ desire for locally produced foods and products.

Raise prices cautiously:

The obvious solution to higher operations costs is to raise prices. The James Beard Foundation in its 2025 Independent Restaurant Industry Report warns of the negative impact of raising prices by too much, so restaurants should do so cautiously while considering the potential effect on consumer demand. The report also discusses alternative sources of revenue to offset higher operation costs, including pop-ups and event spaces. If raising prices, communicate with your customers about the reason for the changes in order to maintain transparency and trust.

Modify your menu:

Consider including more local and seasonal ingredients on your menu. Focus on your most profitable, high-margin dishes and think about reducing portion sizes.

Optimize your operations:

Restructure your operations to minimize waste as much as possible by optimizing inventory management, utilizing technology, and streamlining your systems.

Build customer loyalty:

Make sure that you are providing a high-quality consumer experience that people will be willing to pay for. Consider implementing a rewards or loyalty program, offering customers points or discounts for recurring visits.

Stay informed:

Restaurant owners should stay up to date on the latest tariff developments. The National Restaurant Association is currently appealing to the White House for exemptions for food and beverage products, but future policies are uncertain. For now, the tariff situation is developing rapidly, and restaurant owners should be prepared for change.

Summary

The new tariffs may present significant challenges to the restaurant industry in the coming years, but the changing economic landscape offers business owners an opportunity to rethink their processes, streamline operations, and innovate their business strategies. Planning ahead—and adjusting your business strategies accordingly—will help to mitigate the impact of tariffs on your business.

While you work on strategies for adapting your business to the new tariffs, please know that RBT CPAs is here to support your business’s accounting, tax, audit, and advisory needs. Visit our website or give us a call to learn more.