Business owners who buy assets that have useful lives longer than one year usually cannot immediately deduct the costs of these assets. The costs have to be deducted over a number of years through depreciation.
Luckily for restaurant owners, there is an exception that allows restaurant owners to immediately deduct the costs of smallwares in the year they are purchased and used.
What Are Smallwares?
Smallwares include the following items:
- Pots and pans
- Table top items
- Bar supplies
- Food preparation utensils and tools
- Storage supplies
- Service supplies
- Small appliances that cost $500 or less individually
This Provision Helps Other Food Services Businesses, Too…
This provision applies to corporations engaged in the business of preparing food and beverages to customer order for immediate on-premises or off-premises consumption. In addition to restaurants and cafeterias, this provision also applies to caterers, mobile food servers, bars and taverns, and food or beverage services located in grocery stores, hotels and motels, amusement parks, theaters, casinos, country clubs, and similar social or recreational facilities.
Watch Out for These Traps
There are two situations where an immediate deduction will not be available and the business owner will have to deduct the costs of smallwares over a number of years. The situations are:
- When the smallwares are purchased before the business begins operations. In this situation, the smallwares are treated as start-up expenses. Start-up expenses of up to $5,000 can be deducted the year business operations begin. Excess start-up expenses are deducted over 15 years.
- When the smallwares are purchased and stored, rather than put to immediate use. In this situation, the smallwares are treated as inventory and become deductible when they are put to use.
Example: Janson Family Restaurant will open to the public in July 2013. Prior to its opening, it buys $10,000 of smallwares. Later during 2013, it buys $5,000 of additional smallwares. During 2014, it buys an additional $4,000 of smallwares. Finally, during the last week of 2015, it buys $10,000 of smallwares, but keeps them in storage until 2016.
Janson Family Restaurant can deduct the costs of smallwares as follows:
- The $10,000 of smallwares purchased before opening are treated as start-up expenses. It can immediately deduct $5,000 and deduct the remaining $5,000 over 15 years.
- The $5,000 of additional smallware purchased in 2013 after the restaurant opened are fully deductible in the year of purchase
- The $4,000 of smallwares purchased during 2014 are fully deductible in the year of purchase
- The $10,000 of smallwares purchased during 2015 must be recorded as inventory in 2015 since the smallwares aren’t being used. The $10,000 will be fully deductible in 2016 once they are used.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.