Cost Segregation · Brief · Working level
Cost segregation for restaurants
Restaurants routinely reclassify 25–35% of depreciable basis: kitchen equipment, exhaust systems, decor, and dedicated utilities move to 5-year, and interior build-outs often qualify as 15-year QIP. What moves, and the trap in leasehold ownership.
A restaurant is mostly equipment wearing a building. Studies on owned restaurant real estate routinely move 25–35% of depreciable basis out of the 39-year class — kitchen and bar equipment, exhaust systems, decorative finishes, and the utilities dedicated to them into 5-year property; patios, parking, and signage into 15-year. And because so many restaurants are tenant build-outs rather than owned buildings, qualified improvement property — 15-year, bonus-eligible — does much of the work that a traditional study does for an owner.
What drives the short-life percentage
The kitchen is the engine. Cooking lines, hoods, walk-ins, and dish machines are unambiguous Section 1245 property, and — more valuable — they pull their supporting infrastructure with them. Under the function-based analysis in the Cost Segregation Audit Techniques Guide, electrical circuits, gas lines, grease-waste plumbing, and ventilation that exist to serve equipment are classified with the equipment, not the building. Front of house adds decorative lighting, millwork, banquettes, and floor coverings. Recovery periods follow MACRS asset class 57.0 for most of it, per Pub 946.
Signature restaurant components and their classes (illustrative allocation for a $3M owned freestanding restaurant, land excluded):
| Component | Class | Share of basis |
|---|---|---|
| Kitchen equipment, walk-ins, bar equipment | 5-year §1245 | 12% |
| Exhaust hoods, grease duct, makeup air | 5-year §1245 | 4% |
| Dedicated electrical, gas, grease plumbing | 5-year §1245 | 6% |
| Decorative lighting, millwork, banquettes, flooring | 5-year §1245 | 8% |
| Patio, parking, landscaping, monument sign | 15-year land improvement | 8% |
| Shell, roof, general HVAC, restrooms | 39-year nonresidential | 62% |
Illustrative only; quick-service formats with drive-thrus shift weight toward site work, while chef-driven interiors shift it toward decor.
QIP on build-outs
Most restaurateurs are tenants. Their capital goes into interior improvements to someone else's nonresidential building, and after the CARES Act's technical correction, that work is generally QIP: 15-year straight-line recovery and bonus-eligible, versus the 39 years that misclassified build-outs still sometimes receive. The exclusions matter — enlarging the building, elevators, and internal structural framework stay at 39 years, and QIP requires the improvement to be placed in service after the building was. A cost segregation review of a build-out typically splits it three ways: true personal property (equipment, decor) at 5 years, QIP at 15, and excluded structural work at 39. See how bonus depreciation stacks on each class.
The trap: whose improvement is it?
When a landlord funds the build-out through a tenant improvement allowance, only one party gets the depreciation — and it turns on the lease. If the allowance is a qualified lessee construction allowance under Section 110 (short-term lease of retail space, allowance used for qualified long-term real property), the landlord owns and depreciates the improvements and the tenant excludes the allowance from income. Outside Section 110, a tenant who receives an allowance may have income and its own depreciable basis. Restaurants that run a study on improvements the landlord technically owns are depreciating someone else's property; the classification analysis is worthless if the ownership analysis was skipped. Sort out Section 110 first, then classify. For the broader landscape of how asset classes map to recovery periods, see asset classes and recovery periods and the comparison in cost seg by property type.
Frequently asked questions
- How much of a restaurant can cost segregation reclassify?
- Commonly 25% to 35% of depreciable basis. Kitchen equipment, exhaust hoods, walk-in coolers, decorative finishes, and the electrical and plumbing dedicated to equipment are 5-year Section 1245 personal property; patios, parking, and signage are 15-year land improvements. Interior build-out work in a leased space frequently qualifies as 15-year qualified improvement property. The shell, if owned, stays at 39 years.
- Is a restaurant build-out qualified improvement property?
- Much of it, yes. QIP is any improvement to the interior of nonresidential real property placed in service after the building itself, excluding enlargements, elevators, escalators, and internal structural framework. A tenant's dining-room and kitchen interior work generally qualifies for the 15-year recovery period and bonus depreciation; structural work and building additions do not.
- Does a kitchen exhaust hood qualify as personal property?
- Generally yes. Exhaust hoods, grease ducts, and dedicated makeup-air units exist to serve the cooking equipment, not to ventilate the building for occupants, so cost segregation studies classify them as 5-year personal property under the Audit Techniques Guide's function-based analysis. General dining-room HVAC remains a 39-year structural component.