Your restaurant sits at the top of the reclassification range, frequently 30% to 45% or more of depreciable basis. Almost everything that makes your building a restaurant is equipment, not building. Strip out the hoods, the walk-ins, the line, the bar, the booths, the lighting, the drive-through, and the parking lot, and what you own is a box. Contrast that with a retail shopping center, where most of the money sits in shell construction.
Key takeaways
- Your kitchen, the mechanical and electrical serving it, and your front-of-house finishes are all short-life property, which is why you sit at the top of the range.
- Your dedicated MEP is worth as much as the equipment it serves. Grease waste, gas, make-up air, panels, and floor drains follow the equipment.
- Who owns the buildout changes your analysis, and your remodels reach 15-year QIP only after the §1245 property is carved out.
- A large buildout is one of the strongest §179 candidates in real estate.
The Kitchen Package and the Systems That Serve It
In a 5,000-square-foot restaurant, your kitchen and its supporting systems can absorb a third or more of project cost on a quarter of the floor area. Two lists, and a cost segregation restaurant study is usually thin on the second.
The equipment, all 5-year property: your cooking line, the exhaust hood and its fire suppression, walk-ins with panels, doors, and remote refrigeration racks, reach-in refrigeration, prep equipment, ice machines, dishwashing, and beverage systems.
The dedicated infrastructure, which exists only because that equipment exists and generally follows it: grease waste piping and the interceptor, dedicated gas, dedicated hot water, the make-up air unit and exhaust fans, dedicated panels and circuits, and floor and trench drains.
The 2025 IRS Audit Techniques Guide addresses allocating primary switchgear by electrical load, the method for splitting a service that feeds both cooking equipment and general lighting.
Your Dining Room and Your Parking Lot Are the Other Half
Design spend in your front of house goes into things that are removable, decorative, or both: accent lighting as distinct from general illumination, millwork at the host stand and wall paneling, booths, banquettes, and seating, the bar with its back bar, under-bar refrigeration, and draft systems, POS terminals and cabling, sound and AV, and removable flooring. Priced together, it frequently rivals your kitchen.
Outside, drive-through equipment is 5-year: menu boards, the confirmation display, the speaker post, detection loops, window equipment, and the lane canopy. 15-year land improvements cover your parking lot and drive-through paving, curbing and striping, sidewalks and patio hardscape, site lighting, landscaping and irrigation, the trash enclosure, drainage and site utilities, bollards, and pylon sign structures. On a freestanding pad with a double lane and 45 spaces, that package alone runs 12% to 16% of depreciable basis.
Worked Example: A $3.2M Restaurant With a Drive-Through
Example: a 5,200-square-foot freestanding restaurant bought by its owner-operator for $3,200,000 in June 2026, equipment included Land allocated at $650,000, leaving $2,550,000 of depreciable basis. Study reclassifies 42%: 29% to 5-year, 13% to 15-year land improvements.
| Asset class | Basis | Life and method | Year-one deduction |
|---|---|---|---|
| 5-year (kitchen, dedicated MEP, FOH, POS) | $739,500 | 5-yr 200% DB, 100% bonus | $739,500 |
| 15-year land improvements | $331,500 | 15-yr 150% DB, 100% bonus | $331,500 |
| 39-year building | $1,479,000 | 39-yr SL, mid-month | $20,573 |
| Total | $2,550,000 | $1,091,573 |
Without a study, your $2,550,000 on 39 years produces about $35,471 in year one. The study adds roughly $1,056,000 of deduction, worth about $370,000 of deferred tax at a combined 35% rate. That assumes your operating entity has income the deduction can reach. A single-unit operator in a concept's first year usually does not, and the $1,056,000 becomes a carryforward.
Who Owns the Buildout Changes Everything
Three structures, three answers. The owner-occupant owns land, building, and equipment, so one study covers everything and the full 42% above belongs to one taxpayer. The landlord owns the shell and may have funded a tenant allowance; who holds title and what the lease says at expiration decide whose depreciation it is. The tenant operator normally owns its leasehold improvements and depreciates them under MACRS, not over the lease term. If you are the operator, your study is often the more valuable one, and our guide to renovations and tenant improvements walks the fork.
QIP is real for you, unlike in an apartment
Your restaurant is nonresidential real property, so interior improvements made after the building was first placed in service can qualify as qualified improvement property: 15-year, straight-line, bonus-eligible. Enlargement, elevators and escalators, and internal structural framework are excluded.
Sequence it correctly. Pull the §1245 property out first, apply the repair and safe harbor tests to what remains, and only then treat the residual as QIP. Jump straight to QIP and you have stranded 5-year property on a 15-year schedule. See our qualified improvement property guide.
Your remodel cycle is a repeating disposition opportunity
Brand standards force a remodel every seven to ten years, and each one is two tax events. Most operators book only the first: new spend, short-life heavy, bonus-eligible at 100% for property acquired and placed in service after January 19, 2025 under the One Big Beautiful Bill Act.
The second is what you demolished. Those booths, lights, floors, and millwork still carry adjusted basis on your schedule. Treas. Reg. §1.168(i)-8 lets you elect a loss on that remaining basis and stop depreciating what you threw away, which also shrinks future §1250 recapture. The election is annual and generally irrevocable, made on a timely filed return for the year of disposition. See the partial asset disposition election.
Why your buildout is a strong §179 candidate
For 2026 tax years, §179 allows up to $2,560,000, phasing out from $4,090,000 and fully at $6,650,000, so a single buildout usually fits. It also reaches improvements bonus does not: roofs, HVAC, fire protection and alarm, and security systems under §179(f). The tradeoff is that §179 is capped by business taxable income and cannot create a loss. Compare them in our §179 versus bonus depreciation breakdown.
Three Reasons to Wait
You have no taxable income. A high percentage on a business running at a loss produces a carryforward. Watch §461(l), which for 2026 caps excess business loss at $256,000 single and $512,000 married filing jointly; the excess becomes an NOL that offsets only 80% of future income.
Your basis is small. An 1,800-square-foot space with a $280,000 buildout reclassifies at a high percentage and still may not justify an engineering study. Below roughly $500,000 of depreciable basis, run the numbers first.
You are exiting soon. Your 5-year property is §1245 property, recaptured as ordinary income at up to 37% against a 25% ceiling on unrecaptured §1250 gain. On a two-year hold the rate cost can exceed the timing benefit. A §1031 exchange defers it; a §1014 step-up removes it for heirs.
Frequently Asked Questions
I lease my space. Is a study still worth it?
Often yes, and sometimes more so than for your landlord. Your spend skews toward kitchen equipment, dedicated MEP, and front-of-house finishes, which is the short-life half of the project. The threshold questions are the size of your buildout and whether your entity has taxable income to absorb the deduction.
Is the walk-in cooler equipment or part of the building?
The box, its panels and doors, and the refrigeration system are treated as equipment in a properly documented study, even though the box sits inside the building and connects to the slab. The analysis rests on permanence and function, so your study should state its rationale and keep the installation detail on file.
Can I still do a study on a buildout I completed in 2022?
Yes. A look-back study catches up missed depreciation through a Form 3115 method change and a §481(a) adjustment, taken entirely in the year of change when taxpayer-favorable, with no amended returns. The bonus percentage is the one in effect for your 2022 placed-in-service date, not today's.
Find Out in 24 Hours Whether a Study Pays for Itself
Not every property justifies a study, and we will tell you when yours doesn't. Send Precision Cost Segregation the address, purchase price, closing date, and your rough tax rate, and we will come back with a modeled reclassification range and an estimated first-year benefit at no cost.
This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.