If you own a restaurant business, you may be eligible for a special depreciation allowance that can help you reduce your taxable income and increase your cash flow. Find out in this blog post what you need to know about this tax benefit and how to claim it.
What Is The Special Depreciation Allowance?
The special depreciation allowance, also known as bonus depreciation, is a provision in the tax code that allows you to deduct a certain percentage of the cost of qualified property in the year you place it in service, instead of spreading it over several years. This means you can recover the cost of your investment faster and lower your tax bill.
What Property Qualifies For The Special Depreciation Allowance?
For your restaurant business, in order to qualify for the special depreciation allowance, your business property must meet some criteria:
- it must be eligible for the regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS); this includes most tangible personal property used in a trade or business, such as furniture, equipment, vehicles, computers, etc.,
- it must have a recovery period of 20 years or less under MACRS; this excludes most real property, such as buildings and land improvements (there are some instances when you can claim bonus depreciation for qualified real property),
- you can buy new or used property; for the used property there are some requirements:
- you or your predecessor did not use the property within the past 5 calendar years before you acquired it,
- you must not acquire it from a related party;
- it must be acquired and placed in service within the specified time frame; for example, if you want to claim the 80% allowance for 2023, you must have acquired and placed the property in service between January 1, 2023, and December 31, 2023,
- computer software that is readily avilable for purchase, also qualify for bonus depreciation,
- you must not place the property in service and dispose of it in the same tax year,
- you can not convert the property from business use to personal use in the same tax year,
- if you have listed property, for example a vehicle weighing 6,000 lbs. or less that you use for deliveries in your restaurant business, you must use it more than 50% for business purposes in order to be able to claim bonus depreciation.
How Do You Claim The Special Depreciation Allowance?
To claim the special depreciation allowance, you must file Form 4562, Depreciation and Amortization, with your tax return.
Bonus depreciation is the default method of depreciation for qualifying property in the year you place it in service, so if you do not want to claim it, you need to make an election. But, when you make an election to opt out of the bonus depreciation, you have to make it for an entire class of assets, not only for one asset.
The special depreciation allowance is a deduction you can take in the year you start using the property, in addition to the regular depreciation and any Section 179 deduction. Here’s the order in which you should claim these deductions:
- start with the Section 179 deduction,
- next, claim the special depreciation allowance,
- finally, claim the regular depreciation allowance.
If there’s any remaining basis, you can recover it in the following years using the regular Modified Accelerated Cost Recovery System (MACRS).
What Are Some Examples of Restaurant Property That Qualifies for The Special Depreciation Allowance?
Some examples of property that may qualify for the special depreciation allowance for restaurants are:
- kitchen appliances such as ovens, dishwashers, etc.,
- restaurant furniture, like dining tables,
- bar equipment, for example commercial coffee machines,
- delivery vehicles,
- outdoor furniture and heaters, etc.
In addition to these, if you make improvements or repairs to your restaurant location, you might also be able to claim bonus depreciation in some instances. You should consult with a tax advisor to determine if your specific property qualifies for the special depreciation allowance and how much you can deduct.
Conclusion
The special depreciation allowance is a valuable tax saving tool that can help you save money and grow your restaurant business. If you are planning to acquire or replace any property for your restaurant in the next few years, you should consider taking advantage of this opportunity as soon as possible, because this deduction is planed to phase out by 2027. The bonus depreciation percentages that can be claimed this year and in future years are:
- 60% in 2024,
- 40% in 2025,
- 20% in 2026.
Remember to keep track of your purchases and consult with a tax advisor to ensure you comply with the rules and maximize your benefits.
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.