In 2010, Congress passed a law favorable to restaurants that allowed restaurants to more quickly deduct the costs of buildings and improvements to buildings. This was done in three ways:
- The costs of qualified restaurant property was allowed to be depreciated (deducted) over 15 years rather than the normal 39 years
- Additionally, up to $250,000 of the costs of qualified restaurant property was allowed to be deducted in the year of purchase under the increased Section 179 deduction
- Finally, if qualified restaurant property also qualified as qualified leasehold improvement property it would qualify for 50% bonus depreciation
The law expired on December 31, 2011; however, as part of the Taxpayer Relief Act of 2012 passed at the beginning of 2013, the law has been reinstated for 2012 and is extended through 2013.
What is Qualified Restaurant Property?
Qualified restaurant property includes:
- a building, or
- improvements to a building
- if more than 50% of the building’s square footage is devoted to the preparation of, and seating for on-premises consumption of, prepared meals.
Shorter Depreciation Period
Qualified restaurant property is the only category where Section 179 expense is allowed on the building itself, rather than solely on the improvements.
Example: Tomato Brothers Restaurant buys a building for $300,000. Under old law, the building would be deducted over 39 years at $7,692.31 per year. Since a restaurant building is qualified restaurant property, it can be deducted over 15 years at $20,000 per year.
This favorable provision also allows costs of leasehold improvements to be deducted over 15 years rather than over 39 years.
Increased Year of Purchase $250,000 Section 179 Deduction
Restaurant buildings and leasehold improvements also qualify for the increased $250,000 Section 179 deduction. A major drawback of the Section 179 deduction is that it is limited to the restaurant’s taxable income for the year. Any disallowed Section 179 expense is carried forward. A second drawback of this special provision is that the deduction cannot be carried forward after 2013. Any unused deduction is treated as placed into service on January 1, 2013 and is deducted over 15 years.
Example: In 2012, Paradise Coney Island incurs $200,000 in qualified restaurant improvement expenses. Before taking in account the $200,000 Section 179 expense, Paradise Coney Island has $150,000 of taxable income. Paradise Coney Island’s allowable Section 179 expense is limited to its taxable income of $150,000. The remaining $50,000 of Section 179 expense is carried forward to the next year. If Paradise Coney Island has at least $50,000 of taxable income in 2013 it can deduct the remaining $50,000 in 2013. If Paradise Coney Island does not have income in 2013, the $50,000 unused loss is treated as placed in service on January 1, 2013 and is deducted over 15 years.
Qualified Restaurant Property May Qualify for 50% Bonus Depreciation
If qualified restaurant property also meets the definition of qualified leasehold improvement property, it will qualify for 50% bonus depreciation. Since the building itself will not qualify as leasehold improvement property, only the improvements to a restaurant building (and not the building itself) may qualify as qualified leasehold improvement property.
What is Qualified Leasehold Improvement Property?
Qualified leasehold improvement property means any improvement to an interior portion of a nonresidential building if
- such improvement is made pursuant to a lease by the lessee, sublessee, or lessor of such improved portion
- such portion is to be occupied exclusively by the lessee or sublessee
- such improvement is placed in service more than 3 years after the date the building was first placed in service
Qualified leasehold improvement property does NOT include:
- an enlargement of a building
- any elevator or escalator
- any structural component benefiting a common area
- the internal structural framework of the building
A lease between related persons (e.g., a lease between a taxpayer and his 80% owned business) does not qualify.
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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.