As the dust is settling from tax reform, restaurant owners should be aware of some changes that may have a substantial impact on their tax liability, both positively or negatively. In this post, we discuss the rules related to capital expenses and depreciation for restaurateurs that own buildings or have paid for significant improvements to buildings they lease.

Elimination of Qualified Restaurant Property – Negative Impact

Starting in 2018, the new law eliminates the depreciation category for qualified leasehold improvements (QLI) and qualified restaurant property (QRP), but retains the category for qualified improvement property (QIP).

KROST Insight: Elimination of qualified restaurant property is a blow to the foodservice industry as restaurant building structures will now be depreciated over 39 years (versus the previous 15-year life). Instead, only costs to the interior of restaurant buildings that meet all other requirements of Qualified Improvement Property will be depreciated over 15 years and be eligible for bonus depreciation.

Bonus Depreciation Considerations – Positive Impact

Bonus depreciation has been increased from 50% to 100% through 2022. Notably, Bonus Depreciation is now available for used property after September 27, 2017, but not available if the taxpayer leased the property before purchasing it.

KROST Insight: Cost Segregation studies become extremely valuable under this new provision. Property components identified as land improvements or tangible personal property are eligible for immediate expensing for both newly constructed buildings and acquired property.

Section 179 – Positive Impact

Qualifying property eligible for 179 expensing now includes roofs, HVAC, fire protection & alarm systems, and security systems, providing these improvements are made to a restaurant after the building was first placed in service. Additionally, after 2017, Qualified Improvement Property is eligible for 179 expensing.

KBKG’s Qualified Improvements Reference Chart

With so many changes to depreciation laws over the years, there is often confusion regarding the qualification, recovery periods, and bonus eligibility of various real property improvements. KBKG’s Qualified Improvements Reference Chart (updated 02-02-2018) consolidates these rules into a simple reference table that professionals can use to maximize deductions. » Qualified Improvements Quick Reference Chart (PDF)

Action Steps: If you have purchased, constructed, or spent more than $750k on building improvements (not including land) in the last 15 years, you may qualify for cost segregation. » Find out if your building improvements qualify for cost segregation