Many restaurateurs are unaware of a tax tool that could save them thousands of dollars on their taxes. Cost segregation is a tax strategy restaurateurs can use to reduce their tax liabilities by identifying hidden tax deductions that result in thousands of dollars in tax savings. Because cost segregation isn’t commonly utilized by CPAs, many restaurant owners end up overpaying in taxes.
Cost segregation breaks out certain non-structural components of a restaurant building and allocates shorter life classes to those components depreciating them at an accelerated rate. This means more tax deductions are available in the earlier years of a restaurant.
For tax purposes, the standard class life for most non-residential buildings is 39 years. However, certain non-structural elements of a building, such as most land improvements, dedicated electrical & plumbing work related to restaurant equipment, certain decorative features and elements considered accessories to the operation of the building may qualify for shorter class lives.
For some restaurants, as much as 50 percent of building components can be reduced to five-, seven- and 15-year class lives, which significantly increase a restaurant’s overall tax deductions.
Cost segregation analysis can be performed on real estate put into service as far back as 1987. Tax laws even allow a restaurant owner to go back in time and deduct any depreciation benefits that were missed in prior years, without the need to amend prior year tax returns.
If a restaurateur has constructed, purchased, expanded or remodeled a restaurant, cost segregation analysis can be used to depreciate certain types of property and land improvements over a much shorter period.
All types of restaurant facilities may qualify for a cost segregation analysis, including quick-service, casual and fine dining, even if a restaurateur does not own the building where the restaurant is located.
Restaurants placed into service after 1986 that were constructed or acquired by the current owner are eligible for a cost segregation analysis. Free-standing buildings and build-outs that are part of a multi-tenant space, including malls or strip centers, are all eligible for cost segregation studies.
The non-structural building components (personal property) that qualify for accelerated depreciation include, but are not limited to:
Land improvements that qualify for accelerated depreciation include, but are not limited to:
The Internal Revenue Service recommends using a third party for all cost segregation studies. Restaurateurs should work with someone who specializes in cost segregation, rather than just a standard CPA.
A cost segregation specialist should have engineering expertise that will enable them to identify the various components within a restaurant facility that qualify for accelerated depreciation.
The specialists should also be (or work with) a CPA who is not only an expert in tax law related to cost segregation, but who is also capable of determining whether a restaurateur qualifies for a cost segregation based on their specific tax situation.
The goal of cost segregation analysis is to identify the maximum amount of tax deductions while adhering to the limits of the IRS.
Whether it’s fast food or fine dining, a cost segregation study is a valuable tool for every restaurant concept because it can reduce tax burdens, resulting in increased cash flow for further growth, investment or operational needs.