If you own or operate a restaurant, you may be eligible for a tax deduction that can help you save money on your equipment purchases. You have the option to expense the cost of property used in a trade or business in the year you start using it, instead of depreciating it over multiple years. This can reduce your taxable income in the year of purchase and increase your cash flow.
The types of property that qualify for the Section 179 expense election include tangible personal property, certain other tangible property (excluding buildings), single-purpose agricultural (livestock) or horticultural structures, storage facilities (excluding buildings), off-the-shelf computer software, and qualified real property.
What Is Qualifying Property?
Qualifying property for Section 179 includes tangible personal property that is used more than 50% of the time in your restaurant business. This may include:
- kitchen equipment, such as stoves, ovens, refrigerators, freezers, dishwashers, etc.,
- furniture and fixtures, such as tables, chairs, booths, counters, etc.,
- computers and software, such as point-of-sale systems, accounting software, etc.,
- security systems, such as cameras, alarms, locks, etc.
There are some limitations and exceptions to Section 179. In general, you cannot use section 179 expense election for the cost of land, buildings, or improvements to buildings, with some exceptions. Restaurants can definetely benefit from these exceptions. Check Publication 946 for when cost related to real property can be expensed using section 179 election. Additionally, there are a dollar limit and a business income limit that may reduce or eliminate your deduction. These limits apply to each taxpayer, not to each business.
What Is The Dollar Limit?
The dollar limit is the maximum amount you can deduct under Section 179 for the year. For tax year 2023, the dollar limit is $1,160,000. This means that you can deduct up to $1,160,000 of qualifying property that you placed in service in 2023. However, there is also an investment limit because the dollar limit is reduced by the amount of qualifying property that exceeds $2,890,000. This means that if you place more than $2,890,000 of qualifying property in service in 2023, your Section 179 deduction will be phased out.
For example, suppose you place $3,000,000 of qualifying property in service in 2023. Your dollar limit will be reduced by $110,000 ($3,000,000 – $2,890,000), resulting in a Section 179 deduction of $1,050,000 ($1,160,000 – $110,000).
What Is the Business Income Limit?
The business income limit is another restriction that may affect your Section 179 deduction. This limit requires that Section 179 deduction, after applying the dollar limit, cannot exceed the taxpayer’s business income. This means that you cannot use Section 179 to create or increase a net loss for tax purposes. This business income limit can have intricate calculations depending on your specific tax situation, but you can see more about these rules in Publication 946.
How Do I Claim Section 179?
To claim Section 179, you must complete part I of Form 4562, Depreciation and Amortization, and attach it to your tax return whether or not you file it timely.
What Are the Benefits of Section 179?
Section 179 can provide significant tax savings for restaurant owners who invest in new or used equipment for their business. By deducting the cost of qualifying property in the year of purchase, you can lower your taxable income and reduce your tax liability. This can also improve your cash flow and free up funds for other business expenses or investments.
Section 179 can also simplify your recordkeeping and tax reporting by eliminating the need to track depreciation for each property over several years. This can save you time and hassle when preparing your tax return. However, make sure you keep track of your assets for which you claimed Section 179 and their business usage, especially that there are some Section 179 recapture rules that you need to be aware of and you can find by clicking here.
Conclusion
Section 179 is a valuable tax deduction that can help restaurant owners save money on their equipment purchases. However, it is not a one-size-fits-all solution and may not be suitable for everyone. Section 179 may not always be the best option for every restaurant owner. Before electing Section 179, you should consult with a tax professional who can advise you on the best strategy for your specific situation.
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.