How cost segregation for restaurants creates major tax savings

With robust kitchen equipment and seating areas, restaurants are a unique type of property. Much of the building’s assets are not structural components of the building, but personal property for the business instead. This has implications for cost segregation studies that can help restaurant property owners claim more depreciation expenses faster and boost their immediate cash flow.

Let’s dive into the different ways that cost segregation is unique for restaurants and what the tax implications are.

Commercial Restaurant Cost Segregation

Many assets count as personal property

Restaurants need many pieces of equipment and furnishings to operate. Lucky for restaurant property owners, these types of assets count as personal property on a cost segregation study, which means they can be depreciated over a shorter lifespan (5 or 7 years), leading to significant tax savings. This extra cash flow in the early years of the property can help new restaurant owners turn a profit faster. 

Here are the typical types of personal property found in restaurants that qualify for a 5 or 7-year depreciation period: 

Kitchen equipment: Ovens, stoves, grills, fryers, refrigerators, freezers, dishwashers, and other commercial kitchen appliances.

Furniture: Tables, chairs, bar stools, booths, and other furniture.

Fixtures:  Lighting fixtures, bathroom fixtures, and similar items.

Decorative items: Artwork, mirrors, decorative lighting, and other decorative items.

Electronic equipment: Televisions, sound systems, point-of-sale systems, and other electronic equipment.

Flooring: Carpeting and other types of removable flooring.

Window treatments: Curtains, blinds, and other window treatments.

Custom millwork or built-ins: Custom cabinetry, shelving, or built-in seating.

Restaurants are filled with more of this type of personal property than perhaps any other commercial property type. For new restaurant owners, the first years of the business can be the most difficult as they try to establish themselves. Claiming accelerated depreciation on personal property through a cost segregation study can help a new business get cash flow positive, or even provide more capital to expand to new locations.

Commercial Cost Segregation for Real Estate

Frequent renovations can create more tax savings opportunities

Whether it’s kitchen equipment or in the dining area, restaurants are often renovating, remodeling, upgrading, or replacing. This helps them stay competitive in the marketplace and up to date on kitchen safety standards. In cost segregation, these upgrades can present a new opportunity for tax savings by identifying new assets that are eligible for accelerated depreciation. 

If a restaurant undergoes significant renovations and upgrades, it can be a good time to perform a new cost segregation study, even if one has already been done. The new study would focus on the specific costs associated with the renovations, which could include things like kitchen equipment, flooring, artwork, furniture, and landscaping. 

If the renovation included removing any existing assets, those assets may have some remaining depreciation value left, meaning that they haven’t had time to fully depreciate. For example, if a piece of equipment is eligible for 5-year depreciation but is replaced in year 4, the owner could claim that additional year of depreciation on top of the new depreciation for the replacement equipment.

Commercial Restaurant Cost Segregation Studies

Land improvements can come into play

Some, but not all, restaurants will have substantial land improvements such as parking lots, pathways, landscaping, and outdoor dining areas. This is more likely true in suburban environments where there is land available to create parking and outdoor seating. In dense cities, it’s unlikely to come into play. 

For those that do have significant outdoor areas, land improvement costs can be depreciated over a 15-year period, which is a great improvement over the standard 39-year period and can create some nice tax savings.

Economic considerations made cost segregation more important 

Restaurants in a tough market may have a shorter lifespan than other types of properties. Because of that, it’s important to take as much depreciation expense as early as possible in the lifespan of the property. 

If a restaurant closes after 15 years, then a cost segregation study in year 1 will create much more cash flow throughout the life of the business. All of the numerous personal property assets (5 to 7-year depreciation) and all of the land improvements (15-year depreciation) would be fully depreciated while the restaurant is in business, which maximizes the tax savings that the business could get from cost segregation. This is crucial for a business that has thin profit margins and periods of ups and downs.

Commercial Cost Segregation for Restaurant Owners

How to get your restaurant’s cost segregation study done faster

Cost segregation is important for increasing your restaurant property’s cash flow, but it doesn’t have to be a complicated process. Commercial Property Refund uses proprietary software that automates much of the process and eliminates the need for expensive engineers. 

We can even match you with a CPA who will leverage our software to get the study done faster and provide a much higher ROI on your study than if you were to go with a traditional engineer-led firm. 

Want to know how you could save with cost segregation? 

Check out our free Commercial Property Refund Calculator to estimate how much you can save on your next return.

About Author

Richard Bourgault

Graduating from Georgia Tech with a degree in Electrical Engineering, Richard has gained over a decade of expereince in Cost Segregation coupled with software UX.

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