How do the new tax laws affect my restaurant remodel?
Written by: Lisa Ryan, Senior Consultant
Many of our restaurant clients are completing remodels, and the new tax reform law, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA) provides some new tools that will benefit you but also took away some tools. It’s important to understand how these changes impact your remodel, and how Whalen & Company can help optimize your tax strategy.
When you purchase equipment or remodel your restaurants, you have heard us talk about taking 2 types of depreciation – Bonus and Section 179. We weigh both benefits and determine the proper balance to maximize your tax deductions. Here’s a few highlights of these changes and how it impacts your remodel:
- This is effective for assets acquired and placed in service after September 27, 2017 and before January 1, 2023.
- Bonus Depreciation increased from 50% to 100% of the qualifying purchase, and can now be applied to used equipment, not just new. That is good news especially when you purchase restaurants from other owners.
- Section 179 Depreciation doubled the limit from $500,000 to $1 million, and the phase-out threshold was increased to $2.5 million. Qualifying property now includes roofs, HVAC, fire protection, security and alarms systems for non-residential property. More good news.
- New buildings and improvements to the exterior of a building are not eligible for either Section 179 or bonus depreciation. They are instead depreciated over 39 years, so that’s not such good news. We are waiting to see if Congress changes this as it seems to be a technical issue that was inadvertently included in the tax bill, and we let you know if it’s changed.
How to maximize your depreciation deductions. For remodels where you are also changing the outside of the building, it will be important to identify the interior vs exterior improvements, since the exterior improvements will be expensed over 39 years for the time being, while you will be able to expense most interior improvements right away.
We often recommend that you pay for a “Cost Segregation Study” that will identify the interior vs exterior improvements using your blueprints. Please discuss with our team prior to ordering a cost segregation study so we can determine if it’s worth the cost. We will then use the report to maximize your depreciation deductions.
For new restaurants or if you tear down and rebuild an existing restaurant, you definitely want to order the cost segregation study.
In summary, reach out to your contact at Whalen & Company when you are completing your remodels, as there is more information than highlighted here.
You can reach out to Bruce or Lisa any time for questions, and we look forward to seeing the remodels!