As 2019’s tax year begins to wind down, restaurant, hotel, and food distribution owners have the opportunity to take advantage of a variety of tax depreciation incentives. These tax deductions can be substantial if a business owner purchases a high quantity of fixed assets or a major buildout, or if a refurbishment project for their property is completed and placed into service before the end of this year.
Below is a summary of the tax depreciation incentives that hospitality business owners can pursue:
To the extent restaurant, hotel, or food distribution owners have taxable income, Section 179 enables the owner to deduct the full cost of fixed assets acquired and placed into service, which include machinery and equipment, point of sale systems, furniture, and fixtures. Section 179 can still be claimed if a business owner doesn’t have taxable income, but the depreciation deduction will be suspended into future tax years and utilized when income is available. The deduction can be claimed for acquisitions of both new and used assets.
For 2019, up to $1,000,000 of Section 179 can be claimed on assets that are acquired and placed into service before the end of the year. The full deduction can be claimed as long as the total fixed asset purchases don’t exceed $2,500,000. Once this threshold is reached, the deduction decreases on a dollar for dollar basis. The Section 179 deduction ultimately disappears once at least $3,500,000 of fixed assets have been purchased and are placed into service.
100% Bonus Depreciation
In 2019, 100% bonus depreciation enables business owners to deduct the full cost of a fixed asset in the year the asset is placed into service. Bonus depreciation is not contingent upon whether a taxpayer has taxable income, and there is no limit on the amount of bonus depreciation that can be claimed. Qualifying fixed assets can be new or used and include the same assets that qualify for Section 179.
Qualified Improvement Property
Qualified improvement property is any enhancement to the interior portion of the building, which is considered nonresident property, as long as that improvement is put in service after the building is first placed in service by a taxpayer.
While qualified improvement property qualifies for Section 179, it currently does not qualify for bonus depreciation, as a result of a technical error that was made in the 2017 Tax Cuts and Jobs Act. It is still unclear if this technical error will be fixed. Qualified improvement property that does not utilize Section 179 will be depreciated over 39 years.
There are major tax deductions that can substantially reduce a business owner’s corporate or personal tax liability. As restaurant, hotel, and food distribution owners conduct year-end tax planning, these tax depreciation incentives for asset purchases or renovation projects should be considered.
Business owners that have completed a major asset purchase or renovation project should review their buildout costs with a tax advisor before the end of the year to determine their eligibility for certain tax deductions. Business owners should strongly consider completing and placing any nearly-completed, major renovation projects into service before year-end, in order to take advantage of the tax depreciation deductions.
Our tax specialists are available for consultation on this and other business management topics for restaurants, hotels, food distributors or retail owners. Please contact Aaron Boker or one of our hospitality tax advisors at 301.231.6200 for more information.