Does cost segregation work for restaurant buildings? It absolutely does! The U.S. is filled with buildings like the one above for TGI Fridays. I’m just using this as an example.
Restaurant buildings typically are owned by someone else and not the restaurant owner. If they are owned by the restaurant owner, then that owner might consider grouping his/her real estate entity with the restaurant operating entity to take advantage of the tax savings with cost segregation. To make the designation to “group” those entities, it must be done in the first year you file taxes for the building. Here’s a helpful article about grouping for business owners.
Most restaurants have nicely finished interiors as well as lots of parking. Both are key to taking advantage of the tax savings available through cost segregation. A lot of the internal finishing is going to be reclassified as 5 year class life property. The parking lot, landscaping and overall site improvements will be classified as 15 year class life property. For buildings purchased between September 28, 2017 up until December 31, 2022, the owners can take 100% bonus depeciation on all property with a class life less than 20 years. So obviously all that 5 and 15 year property can be 100% bonus.
What do the numbers look like? Let’s run the following scenario. Let’s say the restaurant was purchased in July 2022 for $1,850,000. The land might be valued at $400,000. So the amount of building basis to be studied is $1,450,000. Of the $1.45MM property, it may be reclassified as follows: (note…these are just estimates based upon experience…each building may have a higher or lower % of the various class lives):
5 year property: 18% / 261,000
15 year property: 8% / 116,000
Total Accumulated Depreciation Expense: 377,000
Tax Savings at 32% Federal Tax Rate: $120,640
Cost: $5,500 – $6,500
Net Cost After Tax: $4,080 (if study is $6k)
ROI: 30:1 —> that’s 3,000% return by the way
BTW, if the owner continues to take just straight line depreciation 1/39th each year, that equates to about 2.5% of the building basis or approximately $36,250 each year. It would take more than 10 years for this owner to get the depreciation on this building that he/she could take with just one year doing cost segregation.
It’s nearly 90% of the owners I speak with have no idea of the tax savings available to them. Their commercial brokers are bringing it up. Their CPAs aren’t bringing it up. So I’m trying to get the word out to help these business / building owners maximize their buildings, reduce their tax burden and drive greater cashflow. It’s not a bad gig.
This does not constitute tax advice. I’m just showing what we might be able to do for this type of building. I recommend that you discuss cost segregation and your particular tax situation with your CPA or tax professional.