New Tax Provision May Benefit Restaurant Owners

Restaurant dinner place setting

Restored Bonus Depreciation May Become ‘Found Money’

By James Bailey, CPA

As the restaurant industry slowly gets cooking again after the COVID-19 shutdown, many restaurants are hurting and may not survive the economic damage done by months of either having no business or doing takeout business only.

But a provision in the Coronavirus Aid Relief and Economic Security (CARES) Act enacted in April may help restaurant owners who have remodeled or otherwise improved their properties in the past two years. The provision restores 100% bonus depreciation for changes made to the interior of commercial buildings – known as qualified improvement property (QIP).

The provision was included to correct a technical error that was made in the Tax Cuts and Jobs Act, the major tax legislation enacted in 2017. Before the tax overhaul was passed, QIP had previously qualified for 100% bonus depreciation, but due to a drafting error in the tax bill it no longer received that treatment.

For restaurant owners hit hard by the COVID-19 crisis, who have recently made improvements to qualified property, this retroactive tax benefit offers the opportunity to recoup taxes paid for 2018 or 2019 (if a return has already been filed), or to minimize taxes that may be owed next year for 2020. For some, this could represent an infusion of cash when they need it most.

The provision in the CARES Act identifies QIP as “15-year property,” meaning it is depreciable over 15 years, which restores 100% bonus depreciation for QIP placed into service in 2018, 2019, and 2020.

Property owners who have made improvements to the interior of their buildings in the past two years may claim the tax benefit in one of two ways:

  1. File an amended tax return for the year in question if the improvements were made in 2018 or 2019, if tax returns for those years already have been filed. The ability to retroactively claim 100% bonus depreciation for those years may trigger additional tax consequences or benefits, depending on a taxpayer’s circumstances. Each situation is different, so a discussion with your tax advisor is recommended.
  2. If you haven’t filed your 2019 tax return yet or you want to wait and claim the depreciation on your 2020 tax return, you can file it with a change of accounting principle that applies retroactively, giving you an election for more favorable depreciation treatment.

To qualify, the improvements must have been made to the interior of your building and placed into service in 2018, 2019, or 2020. This could include remodeling, refreshing and cleanup of the premises, and would also cover both kitchen construction and new equipment.

If you have made interior improvements to your restaurant since January 1, 2018, contact your Adams, Brown advisor for an evaluation of your tax situation. Some “found money” may be coming your way.