Buildings and building improvements that are “qualified restaurant property” are eligible for favorable tax treatment that doesn’t apply to most other buildings or building improvements.
On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). One of the provisions in the PATH Act was to make the 15-year life for qualified restaurant property permanent. Without the passing of the PATH Act, restaurant buildings and building improvements would have a 39-year life for depreciation purposes. Keep in mind that California does not conform to the 15-year life and instead, the 39-year life will apply in calculating depreciation on California tax returns.
Qualified restaurant property as defined by the Internal Revenue Code is any Section 1250 property, which is a building or improvement to a building if more than 50 percent of the building’s square footage is devoted to preparation and seating for on-premises consumption of prepared meals.
Another provision the PATH Act made permanent is the “Section 179” $500,000 expense limitation. This allows for an immediate expense of up to $500,000 (limited to a $2 Million investment threshold) for qualified business use property. Qualified restaurant property as defined above can benefit from the Section 179 expense limits. California does not conform to these higher limits. The maximum deduction for California is $25,000. Note that the Section 179 deduction is limited to total business income.
Most favorably, beginning with improvements placed in service in the 2016 calendar year, any qualified restaurant property that is also “qualified improvement property” is eligible for 50% bonus depreciation. Qualified improvement property includes most non-structural internal improvements that do not enlarge a building and are not used property. That means that 50% of the cost of any qualified property can be deducted in the year it is placed in service. The depreciation life for both qualified restaurant property and qualified improvement property is 15 years for Federal purposes and 39 years for California.
We can help identify improvements that are qualified restaurant property and qualified improvement property. We can also help identify improvements that, even if attached to a building for depreciation purposes, are considered to be machinery and equipment and may potentially qualify for depreciation periods shorter than 15 years.