Trump’s Tax Bill Helped McDonald’s Franchisees

O n Sunday, Donald Trump visited and briefly worked at a McDonald’s franchise in Bucks County, Pa., an exurb of Philadelphia. In between learning how to cook fries and handing bagged orders to drive-thru customers, Trump seemed to be having the time of his life. The real smiles, though, probably came from this McDonald’s franchise owner (and his accountant), as he thought about all the money Trump saved his business in the Tax Cuts and Jobs Act (TCJA).

Maybe it’s just a coincidence, or maybe Trump is more intentional about tax policy than he is given credit for, but there were no bigger winners from the Tax Cuts and Jobs Act (Trump’s signature 2017 tax-reform law) than restaurant franchise owners, and McDonald’s is the industry leader.

As anyone who saw the Michael Keaton movie The Founder knows, most McDonald’s restaurants are not branches of the home office in Chicago. Rather, they are independently owned and operated by small-business franchisees. These businessmen and -women, who usually start out with one McDonald’s but often grow to acquire several, own 90 percent of the McDonald’s restaurants in the country. They have contractual obligations to McDonald’s Corporation, but the restaurants are owned by them, not Big Ronald.

As small businesses, these franchise restaurants overwhelmingly are organized as single or multimember LLCs, being taxed as sole proprietorships, partnerships, and S-corporations. These family-owned businesses pay taxes using personal tax rates, not corporate tax rates. As a result, they benefited immensely from the Tax Cuts and Jobs Act.

First, and most directly, their tax rates went down — way down. Before TCJA, a successful McDonald’s business owner faced a top marginal income-tax rate of 39.6 percent. TCJA cut this rate to 37 percent and also created an exclusion from tax for small-business income known as the “qualified business income” tax cut. When combined, the top income-tax rate on a successful McDonald’s business owner declined from 39.6 percent to 29.6 percent — a full ten points, or a top-rate cut of a quarter (not to be confused with a Quarter Pounder).

The second major TCJA tax cut was full first-year expensing of most franchise costs, rather than having to slowly deduct these costs over time using complex depreciation and amortization tables. The cost of franchise equipment like ice-cream and french-fry machines, tables, and cash registers could be written off in full. The cost of refreshing the look of a McDonald’s (an expensive endeavor done every decade or so) was now “qualifying improvement property” and could also be written off. Franchise owners making $25 million or less per year (indexed to inflation) were allowed to deduct inventory and otherwise use the much simpler cash method of accounting (your checkbook ledger is your profit-and-loss statement).

There’s been some backsliding in this area of the TCJA since it was passed. It took the CARES Act to fully implement the qualified-business-income expensing. But the ability to use it, and to write off the equipment, has been expiring. One hundred percent full business expensing became 60 percent expensing in 2024 and will go down to 40 percent business expensing in January 2025. The rest of the cost is subject to depreciation (ovens and tables over seven years, qualified improvements over 15). And TCJA didn’t do anything to reduce the depreciation life of buying a restaurant or making internal structural improvements. These have to be depreciated over a painful 39-year depreciation window.

The U.S. House of Representatives in 2024 overwhelmingly passed a bill to retroactively and prospectively restore 100 percent full expensing, but it was held up (strangely) by Senate Republicans in an uncharacteristic display of imprudence.

It’s here that Kamala Harris supporters will point to her proposal to let franchise owners expense up to $50,000 of start-up costs (TCJA allows a $5,000 deduction), with the rest amortized over 15 years. A franchise fee (paid to the Chicago franchisor headquarters) is a big expense for a McDonald’s owner. The tax savings from Harris’s proposal is great, but it’s nothing compared to the higher taxes Harris would impose by reversing the rest of Trump’s TCJA tax cuts on successful business owners.

The third and final major area of tax help for McDonald’s franchise owners is a big TCJA cut in the death tax. While the death-tax rate remained the same at 40 percent, the death-tax “standard deduction” doubled and was indexed to inflation (it’s $14 million in 2024). Furthermore, spouses were allowed to inherit an unlimited amount tax free and use both their and their late spouse’s death-tax standard deduction upon their own death (so for most married McDonald’s franchise owners, the death-tax exemption is effectively $28 million in 2024).

Because of Senate budget rules, all of these provisions are set to expire at the end of 2025. The top tax rate for McDonald’s franchise owners will jump from 29.6 percent to 39.6 percent overnight. Franchise equipment and restaurant improvements will again be subject to lengthy depreciation. Thousands of franchise owners will no longer be able to use simple checkbook accounting or inventory expensing. The death-tax “standard deduction” will be cut in half, and the ability of spouses to double it will be lost. Trump and congressional Republicans are running on making all these TCJA tax cuts permanent. That will happen only with a “trifecta” (GOP control of the House, Senate, and White House), and even then it will be very difficult.

If Trump is reelected with a Republican Congress, the first order of business will be making these and the other tax cuts found in the Tax Cuts and Jobs Act permanent. Full business expensing will have to be restored in full, of course. But Congress should do more from there. Harris’s idea to greatly increase the write-off for start-up costs is a good one and in fact should be uncapped for small-business owners. The 39-year depreciation life of franchise restaurants and improvements should be greatly shortened, or even replaced by expensing ideas such as neutral cost recovery. Yes, fries do come with this tax cut.