Cost Segregation for
Restaurant

In terms of complexity of the build-out, restaurants have one of the widest ranges from the walk-up/drive-up style to the highly themed and beautiful venues where a meal is an event.

Restaurant costs default into a 39 year tax life, yet restaurants have more expensive finishes, plumbing, electrical, HVAC that can move into 5 and 15 year tax lives than just about any other property type. This is why restaurants are some of the most complex Cost Segregation assignments and the most lucrative for the tax payer.

It is not uncommon for 5% to 10% of the restaurant’s cost to be treated as Land Improvements with a 15 year tax life and 15% to 30% of the restaurant’s cost to be treated as Personal Property with a 5 year tax life.

Case Study – Restaurant

Facts

The Taco Bell restaurant was 1,500 Square Feet on a 40,000 Square Foot lot. The tax payer bought the property and established the tax basis was $3,000,000.

The interior had fixed-in-place tables and seating, 3 point-of-sales positions, 2 beverage dispensers, a drive-up window, extensive electrical, plumbing and HVAC serving the restaurant equipment and the very expensive finishes one finds in a successful franchise restaurant. The Land Improvements consisted of parking, curbs, sidewalks, underground water runoff, landscaping and the drive-up lane.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the acquisition cost. They then applied a cost model to allocate the purchase price to various trades and building components. They conducted a thorough inspection of the property where estimates were performed. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

Result

Source Advisors reclassified 10% of the tax basis ($300,000) as 15-year land improvements and 20% of the tax basis ($600,000) as 5-year tangible personal property. These results are typical for a national franchise.

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years