September 1, 2020

How a CARES Act Correction to Qualified Improvement Property Can Increase Cash Flow for Bars and Restaurants

After the Tax Cuts and Jobs Act (TCJA) of 2017 brought some unintended consequences to the tax treatment of qualified improvement property, a long-awaited change has come that could provide an immediate cash flow opportunity for restaurants, bars and the hospitality industry as a whole. Businesses that have made any qualified improvements such as ceilings, installation of drywall, interior doors, electrical or plumbing during the last two years can benefit from a technical correction made by the Coronavirus Aid, Relief and Economic Security (CARES) Act.

While the pandemic has had a particularly difficult effect on those in the restaurant and hospitality industry, this new tax savings opportunity could go a long way in helping those within the industry recoup some of the income lost during this time.

Bonus Depreciation Eligibility

Before COVID-19, many restaurants, breweries and bars made improvements to their nonresidential buildings during the last couple of years, such as updating a lobby, kitchen, or distillery. Whether these improvements were remodels, new signage or drive thru windows, these large expenditures were most likely then met with a much higher tax liability than anticipated for 2018 and 2019. The CARES Act provided a technical correction that most have been waiting for since the end of 2017. The CARES Act treats Qualified Improvement Property (QIP) as 15-year property, resulting in taxpayers being eligible to take 100% bonus depreciation on QIP rather than the previously stated depreciation over 39 years. This change is retroactive to January 2018.

Taking Advantage of the New QIP Rules and Retroactive Benefits

It’s important for restaurants and all businesses who have yet to file their 2019 return to re-evaluate all potential QIP for this tax saving opportunity.

Taxpayers who have filed their 2018 and/or 2019 tax returns, and had placed  QIP in service, may consider amending their 2018/2019 return to treat any QIP as 15-year property and eligible for bonus depreciation. Another option to filing an amended return, taxpayers may consider filing Form 3115, Application for Change in Accounting Method, with their 2019 tax return (if not yet filed) or their 2020 tax return and claim the previously missed depreciation as a 481(a) adjustment. This change in accounting method will allow taxpayers to “catch up” all missed QIP depreciation from the beginning of 2018 to current.

Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential impacts and benefits. Visit our COVID-19 Resource Center for more resources. To discuss your situation and recovery options, contact an Anders advisor below.

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July 16, 2019

How Restaurants Can Utilize Bonus Depreciation and Section 179

Accelerating depreciation can provide large tax savings for restaurants and retailers following the Tax Cuts and Jobs Act (TCJA). Bonus depreciation and the Section 179 deduction allow taxpayers to take accelerated depreciation on certain assets, which can be a great tax planning opportunity to take advantage of. Below we dive into the details of bonus depreciation and Section 179, what type of property qualifies and any restrictions.

Bonus Depreciation

Under the TCJA, 100% depreciation is allowed for certain assets purchased between September 28, 2017 and December 31, 2022. Unlike Section 179, bonus depreciation can be used to generate a taxable loss. Taxpayers are not required to take bonus depreciation, and an election out of bonus depreciation can be a useful tax planning tool in the right circumstances.

Qualifying Property

To be eligible, property must be tangible personal property depreciated under the Modified Accelerated Cost Recovery System (MACRS) method with a recovery period of 20 years or less. This includes new or used property such as:

  • Restaurant furniture
  • Restaurant equipment
  • Land improvements

With some exceptions, Qualified Improvement Property (QIP) consists of improvements made to the interior of a restaurant that occurs after the building has already been placed into service.

Restrictions

QIP generally does not include restaurant buildings or improvements to the exterior of restaurant buildings. Under tax reform, QIP was not designated as either 15-year property nor as eligible for bonus depreciation. Currently, QIP does not qualify for bonus depreciation because it does not have a recovery period of 20 years or less. Until technical corrections are issued, QIP should be depreciated over 39 years or could be eligible for the Section 179 deduction.

Section 179

The Section 179 deduction is another useful tax planning tool that allows restaurants to take the total amount of depreciation of an asset in one year. Under tax reform, the maximum amount a taxpayer can expense increased to $1,000,000 with a phase-out limitation of $2,500,000.

Qualifying Property

Qualified real property now includes QIP and certain improvements such as:

  • Alarm systems
  • Fire protection
  • Roofs
  • HVACs

As we addressed above, only certain items are considered QIP, and the eligibility of such property should be evaluated before electing to take the Section 179 deduction.

In many cases, a restaurant or retailer should be eligible for either bonus depreciation or Section 179 on fixed asset purchases. Contact an Anders advisor with questions on how bonus depreciation and Section 179 can be used to your benefit, or learn more about Anders Lodging, Food and Beverage services.

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