Cost Segregation for Restaurant Properties
Restaurant properties—whether freestanding buildings or tenant buildouts—contain significant value in components eligible for accelerated depreciation. Kitchen equipment, hood systems, specialized plumbing, dining room finishes, and signage can all be reclassified from 39-year property to shorter recovery periods. For restaurant owners and investors, cost segregation is a proven strategy to improve cash flow and reduce tax liability.
How Cost Segregation Works for Restaurants
A cost segregation study for restaurants identifies building components and equipment that can be depreciated over 5, 7, or 15 years instead of the standard 39-year schedule.
Engineers with food service experience analyze the property to identify kitchen equipment, specialized plumbing and electrical, hood systems, walk-in coolers, dining finishes, and site improvements.
The detailed allocation allows your accountant to claim accelerated deductions. For existing properties, a catch-up adjustment captures all missed depreciation in the current year.
Why Restaurant Owners Overpay in Taxes
Restaurants contain extensive value in short-life components: cooking equipment, refrigeration, hood systems, specialized plumbing, and dining room finishes. Without a cost segregation study, this is depreciated over 39 years.
Full-service restaurants often have 30-40% of their value in accelerable components. Quick-service and fast-casual restaurants may be slightly lower but still yield substantial tax savings.
Many restaurant operators focus on daily operations and assume their accountant handles tax optimization. In reality, without an engineering study, CPAs can't claim the accelerated deductions available.
Property Components Commonly Reclassified
Restaurants typically achieve 25-40% accelerable percentages. Full-service restaurants with extensive kitchen buildouts often achieve the highest results.
Timing, Retroactive Studies, and Cash Impact
For new restaurant construction or buildout, conducting a cost segregation study at completion maximizes first-year deductions. The extensive equipment and specialized systems make early study particularly valuable.
For existing restaurants, retroactive studies capture all missed depreciation. Restaurant owners who have operated for years often find substantial catch-up deductions available.
Cash impact is immediate: reduced tax liability means more capital for equipment upgrades, expansion, or owner distributions. Many restaurant operators find the study pays for itself multiple times over.
Who Qualifies and Who Does Not
Good Candidates
- •Owners of freestanding restaurant buildings
- •Owner-operators with significant tenant improvements
- •Multi-unit operators with portfolio properties
- •Developers completing new restaurant construction
- •Operators completing major renovations or remodels
- •Properties with cost basis of $500,000 or more
May Not Benefit
- •Tenant improvements owned by landlord (different analysis)
- •Properties with minimal equipment investment
- •Owners planning immediate sale
- •Operators without taxable income
Common Mistakes Restaurant Owners Make
Treating equipment as building fixtures
Kitchen equipment is personal property with 5-7 year lives. Proper classification dramatically accelerates deductions.
Not studying tenant improvements
For owner-operators in leased space, buildout costs are depreciable. Cost segregation applies to tenant improvements just as it does to buildings.
Ignoring renovation projects
Kitchen upgrades, dining room remodels, and equipment replacements create new depreciable basis. Each project should be analyzed.
Assuming small restaurants don't qualify
Even single-unit restaurants with adequate investment can benefit. The study cost is typically recovered many times over.
Waiting for the franchise to advise
Cost segregation is an owner-level decision. Franchise systems don't typically provide tax optimization guidance.