How Cost Segregation Can Improve Restaurant Owners’ Tax Strategies

At a glance

• The main takeaway: Cost segregation is a tax-saving strategy that benefits restaurant owners by enabling them to reduce their income tax burden and increase cash flow on the value of their properties.
• Impact on your business: Restaurant or franchise owners interested in cost segregation should consult a professional advisor for proactive strategies and next steps.
• Next steps: Aprio’s Restaurant, Franchise & Hospitality team and Cost Segregation Specialists can help address your property’s needs when it comes to cost segregation.

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The full story:

Cost segregation accelerates the depreciation timeline for certain property assets, enabling owners to achieve greater tax savings. When taxpayers build or acquire properties, federal tax recovery rates require the taxpayer to depreciate or recover the costs. This is usually on a straight-line basis: more than 39 years for a commercial property (non-residential rental) with an annual deduction of 2.6%.

Property classification

To better understand and determine the depreciation period applicable to your property, assets are classified into different categories:

• 5-Year Property: Assets related to the operation of the restaurant such as kitchen equipment, kitchen electrical and plumbing systems, decorative lighting and finishes, and awnings and signages.
• 15-Year Property: Related to land improvements such as site improvements, landscaping, irrigation systems, and parking lots.
• 39-Year Property: Main structural components of the building such as walls, roofs, windows, plumbing, and electrical systems.

Benefits of cost segregation for restaurant owners

By accelerating depreciation on certain building components, restaurant owners can reduce their taxable income. This method allows for the reclassification of assets, which can result in a faster return on investment as well as providing the opportunity to save funds for reinvestment into the business.

Additionally, cost segregation studies can potentially offer retroactive tax deductions, allowing for past years’ benefits to be claimed. This can result in immediate cash flow increases, which is particularly beneficial for restaurants looking to expand, renovate, or simply boost their operating capital.

• Reduce income tax burden: Depending on the depreciation period applicable to your property, restaurant owners can reap greater tax savings that can be beneficial in expanding or purchasing a new restaurant or franchise.
• Increase cash flow: By accelerating depreciation, restaurant owners can reduce their taxable income in the early years of ownership, leading to significant tax savings and improved cash flow.
• Reinvestment opportunities: Now that restaurant owners have the increased cash flow, they can reinvest it into restaurants improvements or upgrades, expansions, or paying debt.
• Bonus depreciation: A tax rule that enables business taxpayers to write off a large percentage of an eligible asset’s cost in the first year it is purchased.

What does the bonus depreciation entail?

Under the Tax Cuts and Jobs Act (TCJA), taxpayers were able to deduct 100% bonus depreciation for qualified property from September 2017 through the end of 2022. This was a considerable benefit compared to the previous rules for bonus depreciation, which only enabled taxpayers to deduct 50% in most years. In 2023, the phaseout of bonus depreciation began, and the bonus percentage will continue to decrease by an additional 20% each year for property placed in service until Jan. 1, 2027, as exhibited in the table below:

TAX YEAR	BONUS DEPRECIATION PERCENTAGE
2022	100%
2023	80%
2024	60%
2025	40%
2026	20%

In light of the phaseout schedule, restaurant owners should look for other alternative methods to maximize tax deductions while still being compliant with the TCJA rules. It is recommended to consult with a professional advisor to help review a restaurant’s capital expenditures to determine the proper treatment of a particular asset. There are certain considerations that can be included in the tax return that are best identified by your tax advisor.

The bottom line

Restaurant and franchise owners should consult with a professional advisor or CPA when considering a cost segregation study and to determine the best approach for your restaurant. Remember, as a taxpayer, you have the right to explore alternative strategies to maximize tax deductions and increase profitability.

The combination of cost segregation and bonus depreciation serves as a powerful incentive for restaurant owners to invest in their properties, leading to the potential for increased profitability and long-term success in a competitive industry. Aprio’s Restaurant, Franchise & Hospitality team and Cost Segregation Specialists can help you analyze the acquisition costs of a property to identify which assets can be included in a cost segregation study.

Related Resources/Assets/Aprio.com articles/pages

Aprio’s Restaurant, Franchise & Hospitality Services Page

Aprio’s Cost Segregation Services and Specialists

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Making the Most of Tax Deductions with Declining Bonus Depreciation