Don�t overpay in taxes this year
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.
How does it work?
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 in 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.
What are the qualifications?
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 their restaurant operates from.
Restaurants
placed in service after 1986, which 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:
- Dedicated plumbing, electrical and gas lines to kitchen & bar equipment
- Equipment hood fire detection/suppression systems
- Grease traps/tanks
- Walk-in coolers/freezers and related dedicated electrical and plumbing
- Cabinetry
- Counters
- Decorative millwork
- Decorative lighting and related dedicated electrical work
- Certain floor and wall coverings
Land improvements that qualify for accelerated depreciation include, but are not limited to:
- Certain excavation work
- Storm water systems
- Parking lot lighting and related dedicated electrical
- Paving, curbs and sidewalks
- Dumpster enclosures
- Landscaping and irrigation systems
Who can perform a cost segregation analysis?
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 Process
- Initial Consultation:
A restaurateur should talk to a cost segregation specialist to
determine if their restaurant can benefit from a cost segregation
study. The consultation should include a projection of tax benefits for
the specific restaurant facility. This projection should then be used
by the cost segregation specialist or the restaurateur�s CPA in
verifying the restaurateur qualifies for a cost segregation study based
on their specific tax situation.
- Property Analysis:
A property analysis requires a cost segregation specialist to review
blueprints, if available, and conduct an on-site inspection to identify
components of the property that are subject to accelerated
depreciation. A properly documented cost segregation study should
include photographs of property components eligible for accelerated
depreciation.
- Identification of Component Costs:
A cost segregation specialist will usually use either an �actual cost�
or �engineered cost� approach to identify cost detail related to all
the component costs of the restaurant property. The �engineered cost�
approach is a cost estimating approach accepted by the IRS that
provides the most specific cost detail and most often the greatest tax
benefit. The detail gathered from either approach will then be
categorized into the proper property classes for tax purposes.
- Cost Segregation Analysis:
During this stage, a cost segregation specialist will produce a formal
written report for a restaurant owner�s records. These records, along
with supplementary instructions from the cost segregation specialist,
should be provided to a CPA so they can incorporate the cost
segregation analysis into the current year's tax return.
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.
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