CARES Act: Restaurant Property

While the PPP (Paycheck Protection Program) has been a major focus of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, there were many other business-friendly provisions included to support a broad swath of industries. One provision is a technical correction of an error in the 2017 Tax Cuts and Jobs Act (TCJA) relating to the acceleration of depreciation deductions for restaurant improvements.

Qualified restaurant property is any building or improvement to a building where more than 50% of the square footage is used for the preparation of and seating for on-site consumption of prepared meals. Prior to the TCJA, these improvements, along with a few other types of leasehold improvements, could be eligible for a 15-year class life and accelerated bonus depreciation. The TCJA combined these varied property types and further expanded eligible improvements via the creation of Qualified Improvement Property (QIP). QIP applies to improvements placed in service after September 27, 2017, and is defined as an improvement to the interior portion of a commercial building, if placed in service after the building was originally placed in service. QIP does not include building enlargements, elevators or escalators, or any internal structural framework.

While the expanded and simplified definition was welcome news, tax writers unfortunately neglected to specify QIP as 15-year property, thereby relegating these improvements to the 39-year recovery period applicable to other commercial real property. The 39-year recovery period also eliminated eligibility for accelerated bonus depreciation on these assets, although the assets could qualify for section 179 expensing for smaller taxpayers. While Congress signaled the intent was to define QIP as 15-year property, without a technical correction through legislation taxpayers were stuck.

As part of the CARES Act, passed to support businesses through the Covid-19 pandemic, Congress was able to make the correction and redefine QIP as 15-year property eligible for the first year bonus depreciation deductions. The IRS has issued guidance that allows for the filing of Form 3115, Application for Change in Method of Accounting, to claim the missed depreciation and/or make, revoke, or withdraw bonus depreciation elections for eligible property placed in service during 2018, 2019, or 2020.

Please contact a Marcum tax professional to discuss any questions you may have.