The restaurant industry is a field filled with many opportunities to save money on corporate taxes. A majority of these tax deductions do not require significant time and can provide a lot of benefits to your business. Here are a few things to consider.
Depreciation
First, let’s look at a deduction related to accelerated depreciation expenses. Restaurants are consistently having to replace furniture and kitchen equipment, or refreshing the aesthetics of the establishment. All these improvements are capital expenditures that are required to be capitalized and depreciated over their useful life. Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment that is purchased during the tax year if the capitalized cost provided doesn’t exceed certain thresholds. Section 179 cannot make the taxable income negative and for 2023 you are limited to the first $1,160,000 of expenditures so long as the overall capital expenditures do not exceed $2,890,000.
Even though all capital expenditures that are placed in service are depreciable, the accelerated depreciation methods are not available to real property (i.e. buildings, parking lots, etc.). If your establishment purchased a building, we recommend considering a cost segregation analysis to determine if a portion of the costs are eligible under the accelerated depreciation methods.
An alternative for accelerated depreciation is to use Section 168 which is commonly referred to as “Bonus Depreciation”. Section 168 may apply if the business is at a loss, it has over $2,890,000 in capital expenditures, or if there are certain types of trusts and IRA’s that are owners of the entity (as certain types of trusts and IRA’s cannot receive the immediate benefit of Section 179). In 2023, this provision allows companies to deduct 80% of the qualified capital expenditures immediately and the other 20% over their useful life. Historically, this allowed 100% deduction, but that practice is being phased out. The accelerated deduction is 80% of the costs in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and zero starting in 2027. The portion not deducted under Section 168 will be depreciated over its useful life using a modified accelerated cost recovery system (MACRS).
Another factor to consider when discussing depreciation is if it makes sense to claim either §179 or §168 as described above, or if it makes more sense to opt out of them. If your business will be at a loss with or without the accelerated depreciation provisions, then you will need to consider when and how those losses will be utilized. If depreciating under §179 or §168 will be increasing a Net Operating Loss (NOL) and there is taxable income projected in the near future, then the business may consider performing an additional analysis on when taxable income is expected and if it’s better to have the larger NOL carried forward or have the depreciation deductions preserved for those future periods. This is because NOL’s are currently limited to 80% of taxable income going forward.
Related sections
Article Tags
