Cost Segregation Studies for RESTAURANTS

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Cost Segregation Analyses Performed

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Restaurant Cost Segregation
Studies
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01

How does a Restaurant Cost Segregation Study Work?

  • Cost segregation in restaurants is a tax planning strategy that helps restaurant owners accelerate depreciation deductions 
  • This engineering-based analysis identifies and quantifies building components 
  • Components are then reclassified into shorter-lived tax categories, resulting in accelerated depreciation, tax deferral, and increased cash flow 
  • Study can be performed on a newly constructed restaurant, an acquired restaurant, or a restaurant undergoing renovation

02

What are the Benefits of Cost Segregation Analysis for a Restaurant?

  • A cost segregation analysis of a restaurant can create $100K-$400K in federal tax benefits for every $1M spent. Engineers generally accelerate 20-60% of assets in a restaurant 
  • “Bonus” depreciation is an additional incentive that may be claimed above and beyond accelerated depreciation  
  • A quality cost segregation analysis of restaurants also provides the documentation necessary to support a host of other tax strategies, including Tangible Property Analysis, Partial Asset Dispositions, and EPAct 179D Energy-Efficiency Deductions 

03

Which Retail Assets are Commonly Segregated?

  • Shorter-Lived 5-Year Assets May Include:  
    • Commercial Kitchen Equipment  
    • Walk-In Freezers and Coolers  
    • Beverage Equipment, Dispensers, and Specialty Tubing or Piping 
    • Specialty Water, Gas, and Drain Lines 
    • Specialty Plumbing and Electric Hook Ups 
    • Lightweight Eliason Doors Between Kitchen and Dining areas 
    • Drive-Through Equipment 
    • Food Storage and Preparation Equipment 
    • Wallpaper  
    • Window Treatments  
    • Decorative Lighting in Dining Room 
    • Sound Systems in Dining Room  
    • Restaurant Décor and Accessories – Mirrors, Signage, Etc.  
    • Furniture – High Stools, Dining Room Tables and Chairs, Booths, etc.  
    • Paddle Fans  
    • Fire Extinguishers and Hoods  
    • Alarm/Security Systems 
  • Shorter-Lived 15-Year Land Improvements May Include:  
    • Landscaping  
    • Paved Parking Lots  
    • Sidewalks   
    • Poles and Pylons
ASCSP Certified Professionals on Staff

Restaurant Cost Segregation Studies: Case Studies  

Restaurant Cost Segregation Study:

New Construction, Quick-Serve

Restaurant Cost Segregation Study: New Construction, Quick-Serve

Restaurant

Freestanding restaurant with main dining room, point-of-sales desk, full-service commercial kitchen, and drive-through system 

 

Parking

Dedicated parking lot with landscaping 

November 2021

Newly constructed and placed-in-service November 2021
 

$2,096,677

Depreciable basis

Engineers Moved

28.0% to 5-Year  

29.9% to 15-Year Land Improvements

$358,183

First Year Tax Savings

Restaurant Cost Segregation Study:

Acquisition, Contemporary Casual

Restaurant Cost Segregation Study: Acquisition, Contemporary Casual

Waterfront

Waterfront dining with indoor and outdoor seating areas, dedicated event space 

 

Entertainment

Tiki bar, fire pits, playground, outdoor games  

    August 2021

    Acquired and placed-in-service August 2021 

     

    $1,081,859

    Depreciable basis

    Engineers Moved

    42.4% to 5-Year  

    11.1% to 15-Year Land Improvements

    $204,067

    First Year Tax Savings

    Restaurant Cost Segregation Study:

    Renovation, Full-Service

    Restaurant Cost Segregation Study: Renovation, Full-Service

    Renovation

    Custom-made interior and exterior dining tables, chairs, banquettes

    Built-in custom millwork, stained-glass, mosaics

    Pergola System

    Newly installed pergola system opens patio and outdoor bar to the sky year round, but closes it to inclement weather

    March 2023

    Placed-in-service March 2023

    $3,584,363 

    Depreciable basis

    Engineers Moved

    36.2% to 5-Year  

    0.8% to 15-Year Land Improvements  

    21.9% to 15-Year QIP   

     

    $588,561

    First Year Tax Savings

    Restaurant Cost Segregation Study:

    Tenant Improvements, Pub & Restaurant

    Restaurant Cost Segregation Study: Tenant Improvements, Pub & Restaurant

    Pub & Restaurant

    Building shell was completely built out by tenant — central bar and dining areas, plus installation of all furniture and kitchen equipment 

    Parking

    Outdoor patio and parking  

    September 2023

    Fit out completed and placed-in-service September 2023  

    $3,086,997

    Depreciable basis

    Engineers Moved

    63.8% to 5-Year   

    7.9% to 15-Year Land Improvements 

    28.3% to 15-Year QIP 

    $808,880

    First Year Tax Savings

    Cost Segregation Analyses Performed

    Cost Segregation in Restaurants: FAQs  

    What is the Impact of a Cost Segregation Study on a Restaurant’s Tax Liability? 

    Restaurant cost segregation results in an immediate decrease in tax liability and a commensurate increase in cash flow.  

    By performing a cost segregation study on a restaurant, certain assets will be reclassified into shorter depreciation categories. This accelerates depreciation deductions – meaning you get the deductions faster – taking advantage of the time value of money. A dollar today is worth more than a dollar tomorrow – why not get that dollar today?  

    Cost Segregation Study on a Restaurant

    Can a Cost Segregation Study be Performed on Any Type of Restaurant?

    Cost segregation can be performed on virtually any restaurant. From a small quick-service place to the most elegant of eateries, specialty kitchen and dining room fit-outs make any restaurant a solid cost seg candidate. Successful cost segregation studies are performed for cafes, caterers, specialty drink shops, buffet restaurants, and everything in between.  

    If you’re constructing a restaurant from the ground-up, acquiring a new restaurant, or renovating your space, a cost segregation study can put money back into your pocket, and into your business.  

    Can I Perform a Restaurant Cost Segregation Study even if the Restaurant was Constructed or Renovated in a Previous Tax Year? Can the Study be Applied Retroactively? 

    Yes!  Restaurants that were placed-in-service in a previous tax year can be great candidates for a look-back cost segregation study. By reclassifying assets to their correct lives, taxpayers can retroactively “catch-up” on all the depreciation they would have gotten had the study been performed on day one.  

    Cost Segregation Study of Restaurant Constructed or Renovated in a Previous Tax Year

    Are there Specific Regulations or Guidelines for Cost Segregation in Restaurants?  

    Restaurant cost segregation studies – like all cost segregation studies – must be performed according to the IRS’ Cost Segregation Audit Techniques Guide  

    Who Can Perform a Restaurant Cost Segregation Study?

    An engineer-performed study is explicitly recommended by the IRS’ Cost Segregation Audit Techniques Guide. Only a trained engineer has the technical and tax knowledge required to complete a quality study that is both thorough and defensible.  

    That said, not all cost segregation providers are created equal. Be sure to do your homework before selecting a provider.  

    How is a Restaurant Cost Segregation Study Conducted?  

    The restaurant cost segregation process is quite straightforward 

    1. We gather information about you and your property.  
    2.  We provide a complimentary Estimate of Potential Benefits, along with a customized plan to maximize tax savings based on your needs and goals.  

    If you decide to move forward with the study:  

    1. A Capstan engineer visits your property, methodically walking it and taking many notes and photos to quantify each asset.  
    2. The engineer will use his notes, along with client provided documents, to painstakingly assign costs to each asset.  
    3. The assets will then be segregated into the aforementioned categories, and the results will be evaluated by two different reviewers for tax and technical accuracy.  
    4. A thoroughly documented report containing spreadsheets, photos, graphical analysis, and 100+ pages of content will be delivered, along with the Capstan Warranty that promises no-cost defense in the unlikely event of an audit.  

    How Long Does It Take to Complete a Restaurant Cost Segregation Study?  

    Timing of a cost segregation study in a restaurant will vary based on project complexity, but reports are generally delivered within 30 days of the site visit.  

    How Much Does a Cost Segregation Analysis of Restaurant Property Cost?

    The fees for cost segregation in a restaurant will vary based on:   

    • Property size, type, location  
    • Property history/complexity  
    • What property information is readily available  

    The usual return on investment for a cost segregation report is well over 10 to 1, and most taxpayers find that the fee is well outweighed by the benefit.  

    Are There Any Risks Associated with a Restaurant Cost Segregation Study?  

    The main potential drawback of a restaurant cost segregation study is depreciation recapture. 

    However, if the restaurant is held for at least 3-5 years, the benefits of accelerated depreciation generally outweigh the potential tax liability from recapture. Furthermore, there are multiple strategies in play that minimize recapture, including PAD (Partial Asset Disposition) Elections and 1031 Exchanges. 

    Your tax professional and cost segregation consultant can help you determine if recapture tax is a realistic concern in your particular situation. 

    How Can I Learn More About Cost Segregation in Restaurants?  

    If you’d like to learn more about cost segregation in restaurants, please reach out. We’re here to help.  

     

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