During these uncertain times, you most likely are searching for ways to keep your restaurant operating and sustaining cash flow. Relief may have come from the Paycheck Protection Program and you may have focused on delivery and pick-up options to mitigate the recent health mandates. There is hope that sooner than later your restaurant can return to operating at full capacity. In the meantime, you should consider other options to generate cash flow. In particular, a cost segregation study could bring benefits in the form of increased tax deductions, especially if you have bought a building for your restaurant or if you have significantly built out a space or remodeled one of your locations.
A cost segregation study captures all costs associated with a building or building improvement and breaks them out into their appropriate personal or real property classification. As a result of the cost segregation study, the you can expense .the personal property over a shorter period of time (5, 7, or 15 years) and benefit from the deductions up front rather than allowing the total construction cost to be written off over the life of a building, which is 39 years. The tax savings generated by depreciating more assets as personal property usually more than make up the extra cost incurred in conducting the study. In addition, over the next several years, the benefits are even greater with bonus depreciation (write off 100% of cost up front).
The goal for the cost segregation study is to identify costs related to real property that can be reallocated to short-life personal property. An example of this could be identifying electrical or plumbing costs that may be related to kitchen equipment, which is generally depreciated over five years. Another example would be identifying other kitchen equipment hook-ups such as gas or water lines. Finally, another example would be identifying the decorative millwork and lighting. Decorative millwork and lighting enhances the theme or restaurant concept, but it is not related to the operation of the building itself.
Ultimately, the reallocation of costs provides greater cash flow to your restaurant by reducing the overall tax burden and possibly creating a loss that can be used to offset income in a previous year or carried forward. Since cost segregation studies often involve engineers, it is recommended that you reach out to an experienced tax professional who can assist in the process.
Kelly P. Lynch, CPA