Tax Planning for a Pandemic – Understanding the Rules

This article was written by Anton Rayetskyy and Richard Shevak for NRN.

To describe 2020 as a challenging year for the restaurant industry would be an understatement. With indoor dining shut down or severely restricted across the country, many unforeseen expenses were incurred to quickly create or expand outdoor seating, takeout and drive-thru options. Then, as restrictions began to lift, restaurants of all sizes faced many more expenditures to provide safe and comfortable conditions to the returning customers.

Those expenses included improvements to old — or installations of new — air-filtration or ventilation systems (e.g., HVACs); purchasing of specialized equipment; installation of physical barriers; supplying of personal protective equipment (PPE) and more.

One small silver lining is that these expenses also created significant tax deferral opportunities that can help mitigate the resulting financial burdens on restaurants. Here’s what you need to know about which purchases can produce great tax benefits:

Bonus depreciation

In general, when a restaurant purchases equipment, furniture, or appliances, or makes improvements to leased or owned real property, it is allowed to deduct the cost of those assets over their Internal Revenue Service-assigned useful lives. This cost recovery is achieved through annual depreciation expense that is claimed on the company’s annual income tax return.

The Internal Revenue Code provides businesses with an opportunity to accelerate these deductions by taking advantage of additional first-year depreciation (“bonus” depreciation) on qualified depreciable property. Bonus depreciation is available in some — but not all — states. It can create significant tax planning opportunities for restaurants.

Prior to the Tax Cuts and Jobs Act (TCJA), which was passed in 2017 and made several favorable amendments to tax-depreciation rules, a restaurant was generally able to claim a 50% bonus depreciation deduction in connection with the purchase of qualifying new property. Examples of such assets included machinery, equipment, furniture, and qualified improvement property (QIP, further defined below).

Taking 50% bonus meant that a business could immediately expense 50% of the cost of these assets in the first year they were placed in service. TCJA significantly expanded bonus depreciation rules and increased the deduction of qualified property to 100%.

The tax law provides other opportunities to accelerate deductions related to certain acquisitions and repairs, but this article is focused on opportunities coming from bonus depreciation.

What is eligible for bonus depreciation?

Many restaurant expenditures including leasehold improvements and upgrades will be eligible for bonus depreciation. Qualified property includes depreciable assets with useful lives of 20 years or less and would typically include the above-mentioned assets…

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