How To Master Restaurant Depreciation: A Plain-English Guide for Owners

With current bonus depreciation rules, you can write off 80% of your kitchen equipment depreciation in the first year. But, these rules are changing and understanding them is crucial. From cooking equipment to refrigeration systems, we’ll break down exactly how to track and claim depreciation on your restaurant assets to reduce the tax burden.

Restaurant Equipment Depreciation Basics

“Equipment depreciation is an accounting method used to measure the gradual decrease in the value of your assets over time (or its useful life).” — LLumin, Asset management software company

Fixed assets form the backbone of your restaurant operations, ranging from kitchen equipment to POS systems. Understanding what qualifies as depreciable equipment and when to start claiming depreciation helps maximize your tax benefits.

What counts as equipment

Restaurant fixed assets encompass any tangible items purchased for daily operations that provide economic benefits beyond one year. These assets fall into distinct categories with specific depreciation timelines:

Kitchen and Food Service Equipment:

• Food storage and preparation systems
• Beverage equipment including refrigerators and dispensing systems
• Special electrical connections for specific machinery
• Kitchen equipment hookups including water, gas and drain lines

Furniture and Fixtures:

• Dining room tables and chairs
• Bar stools and booths
• Decorative light fixtures
• Special lightweight double-action doors

Technology and Systems:

• Point of Sale (POS) systems
• Cash registers
• Computerized sales systems
• Related peripheral equipment

Additionally, concrete foundations for signs, light poles and canopies qualify as depreciable assets. When constructing new assets or completing build-outs, all direct costs including purchase price, transportation, installation and other direct expenses contribute to the total depreciable basis.

When depreciation starts

The timing of depreciation claims follows specific rules established by tax authorities. Depreciation begins as soon as you place equipment into service to generate income in your restaurant. For instance, when you install a new commercial oven, depreciation starts once the equipment is operational and ready for use in your kitchen.

The depreciation period continues until one of two events occurs:

• You fully recover the cost basis of the equipment
• The equipment is retired from service

Under current regulations, restaurant assets can be depreciated over varying timeframes:

• Kitchen equipment and furniture: 5 years
• Office furniture: 7 years
• Building improvements: 15 years
• Building structure: 39 years

Furthermore, the Protecting Americans from Tax Hikes Act established a 15-year recovery period for restaurant property, significantly shorter than the previous 39-year timeline. Nevertheless, certain requirements must be met to qualify for bonus depreciation under these provisions.

For optimal tax benefits, assign the smallest allowable depreciable life to your restaurant assets. Additionally, consider grouping routinely purchased items that exceed your threshold as a single fixed asset, depreciating them together over their useful life. This approach streamlines your record-keeping while maintaining compliance with IRS guidelines.

Different Ways to Claim Depreciation

Three primary methods exist for claiming depreciation on your restaurant equipment, each offering distinct advantages based on your financial situation and tax strategy needs.

Straight-line method

The straight-line depreciation method provides a simple, consistent approach to calculating annual deductions. Under this system, divide the depreciable cost basis by the asset’s useful life in months to determine monthly depreciation expenses.

Consider this example: If you purchase an industrial oven for $10,000 with an estimated salvage value of $2,000 and a five-year useful life, your annual depreciation calculation would be:

• Cost minus salvage value: $10,000 – $2,000 = $8,000
• Annual depreciation: $8,000 ÷ 5 years = $1,600 per year

This method works particularly well for restaurant owners who prefer predictable tax deductions and straightforward bookkeeping.

Accelerated depreciation

Accelerated depreciation allows you to claim larger deductions during the early years of an asset’s life. Two main variations exist: the Declining Balance Method and the Double-Declining Balance method.

For example, using a 30% depreciation rate on a $1,000 mixer with a $100 salvage value and 10-year useful life:

• First year: $270
• Second year: $189
• Third year: $132

The 2023 bonus depreciation rules permit:

• 80% deduction in 2023
• 60% in 2024
• 40% in 2025
• 20% in 2026
• 0% starting 2027

The remaining portion not deducted through bonus depreciation follows the Modified Accelerated Cost Recovery System (MACRS) schedule.

Section 179 expensing

Section 179 offers substantial immediate tax benefits by allowing you to deduct the full purchase price of qualifying equipment in the year of purchase. For 2023, key limits included:

• Maximum deduction: $1,160,000
• Phase-out threshold: $2,890,000

Important considerations for Section 179:

a) The deduction cannot create negative taxable income;

b) Equipment must be placed in service during the tax year;

c) Deduction amount cannot exceed earned income.

Before choosing a depreciation method, analyze these factors:

• Current taxable income levels
• Projected future earnings
• Net Operating Loss situations
• Equipment replacement cycles

If your business anticipates losses with or without accelerated depreciation, consider timing these deductions strategically. Since Net Operating Losses are limited to 80% of taxable income going forward, proper planning becomes crucial.

Moreover, repair regulations deserve attention. Many restaurant owners capitalize repairs that extend asset life. Yet, under current rules, you might deduct the full amount if the repair:

• Does not involve major components
• Qualifies as routine maintenance
• Affects non-critical building systems

Through strategic depreciation planning, you can optimize tax benefits while maintaining accurate financial records. Each method offers unique advantages, therefore choosing the right approach depends on your specific business circumstances and financial goals.

Kitchen Equipment Depreciation Life

Understanding the lifespan of your kitchen equipment helps plan for replacements and maximize tax benefits. Each piece of equipment in your restaurant has specific depreciation timelines based on IRS guidelines and industry standards.

Cooking equipment timeline

Commercial cooking equipment typically maintains functionality between 5 to 10 years. This category encompasses:

• Commercial ovens
• Deep fryers
• Grills
• Steam trays
• Cooking vessels

The IRS classifies food preparation equipment under “Distributive Trades and Services” with a 5-year depreciation schedule. Notably, specialized equipment hookups also follow this timeline, specifically:

• Water lines connecting to steam trays
• Gas lines linking to fryers and ovens
• Special drain lines for specific equipment
• Ventilation systems dedicated to kitchen operations
• Equipment exhaust hoods
• Localized power sources for specialized cooking units

Refrigeration systems

Refrigeration units serve as critical components in food storage and preservation. These systems require careful monitoring as their efficiency directly affects operational costs. Commercial refrigeration equipment falls under the same 5-year depreciation category as other kitchen equipment.

Key considerations for refrigeration depreciation:

• Complete beverage storage systems
• Cooling units
• Dispensing mechanisms
• Dedicated electrical connections
• Associated tubing and piping

Replacing refrigeration systems near the end of their useful life often proves cost-effective through reduced energy consumption and maintenance expenses.

Small tools and utensils

Small tools and utensils follow unique depreciation rules under Revenue Procedure 2002-12. These items can be deducted in the year of purchase rather than capitalized, provided they meet specific criteria. Qualifying items include:

1. Glassware and flatware
2. Dinnerware sets
3. Pots and pans
4. Table-top items
5. Bar supplies
6. Food preparation tools
7. Storage supplies
8. Service items
9. Small appliances costing $500 or less

Specifically, these items must be:

• Actually consumed and used in business operations
• Received and available for immediate use
• Not stored in warehouses for future use

One important exception exists: items with significant artistic or intrinsic value, such as precious metal flatware or antique decorative pieces, cannot qualify for immediate deduction.

For tax purposes, large purchases of small tools near year-end require special handling. When stored for use in the following year, these costs must be inventoried and expensed when actually put into service. This timing consideration affects your depreciation strategy and tax planning.

The depreciation timeline starts precisely when equipment becomes operational in your restaurant. This means the date you place items in service – not the purchase or installation date – determines when depreciation begins. Understanding these nuances helps optimize your tax strategy while maintaining accurate financial records.

Tax Savings Through Depreciation

“Section 179 can be used to recover 100% of the depreciation expenses for an asset in the tax return that applies to the year in which you purchased the asset, up to the relevant limit for that tax year.”

— Golden Apple Agency, Insurance and financial services agency

Smart tax planning through depreciation can substantially reduce your restaurant’s tax burden. Understanding the current deduction limits and bonus depreciation options unlocks significant financial advantages for your business.

Maximum deduction limits

For 2025, Section 179 offers generous deduction opportunities with a maximum limit of $1,250,000. This deduction applies primarily to small and mid-size restaurants spending less than $4.38 million yearly on equipment.

The phase-out threshold starts at $3,130,000. Once your equipment purchases exceed this amount, the available deduction gradually decreases. Equipment investments above $4,380,000 cannot qualify for Section 179 deductions although they might still be eligible for bonus depreciation.

A cost segregation study presents another effective strategy to maximize tax savings. This approach reclassifies various restaurant components into shorter depreciation periods:

• Kitchen equipment
• Lighting systems
• Flooring materials
• Building components

Through cost segregation, instead of depreciating your entire building over 39 years, these components can be depreciated over 5, 7 or 15 years. This strategic reclassification often results in immediate tax deferrals, potentially saving $60,000 or more within the first few years.

Bonus depreciation options

Bonus depreciation rules continue changing, making it essential to understand current provisions. In 2025, the bonus depreciation rate will be 40%. This represents a significant shift from previous years, as the rate decreases by 20% annually until reaching 0% in 2027.

The current bonus depreciation schedule follows this pattern:

• 2024: 60% deduction
• 2025: 40% deduction
• 2026: 20% deduction
• 2027: 0% deduction

Unlike Section 179, bonus depreciation offers distinct advantages:

• Can generate taxable losses
• Applies to both new and used equipment
• Available even after reaching Section 179 limits

One often-overlooked strategy involves combining Section 179 with bonus depreciation. IRS rules require applying Section 179 first, subsequently followed by bonus depreciation. This combination might allow deducting up to 100% of capital purchases, provided the equipment falls under the phase-out threshold.

Tax depreciation typically exceeds book depreciation due to accelerated depreciation systems permitted by the IRS. Although CPAs commonly record tax depreciation in their clients’ books to match tax returns with financial statements, alternative approaches exist. You can benefit from tax depreciation while maintaining your financials on book depreciation, offering flexibility in financial reporting.

Setting Up Your Depreciation System

Proper record keeping and the right tools make restaurant depreciation tracking straightforward. A well-organized system helps maximize tax benefits and ensures compliance with IRS regulations.

Record keeping essentials

Maintaining detailed documentation of your fixed assets forms the foundation of effective depreciation management. Your records must track:

• Asset acquisition costs
• Installation expenses
• Transportation charges
• Direct setup costs

Accurate record keeping enables you to monitor asset lifecycles, depreciation schedules and maintenance records. This documentation proves essential whenever you need to:

• Generate detailed reports on acquisition costs
• Track depreciation history
• Monitor current asset values

Software tools

Modern depreciation software streamlines asset management through automated calculations and centralized tracking. Quality software solutions offer:

• Automatic depreciation based on configured asset classes
• Customizable depreciation schedules
• Asset lifecycle monitoring across multiple locations
• Integration with QuickBooks, Xero and other accounting platforms

These systems help reduce manual data entry and minimize errors in financial reporting. Additionally, automated depreciation calculations support finance teams in managing budgets and forecasting future investments.

Working with accountants

Partnering with a qualified Certified Public Accountant (CPA) specializing in restaurant operations proves valuable for complex depreciation scenarios. Professional accountants assist by:

1. Examining property and equipment to determine proper categorization
2. Maximizing depreciation benefits through tax code expertise
3. Filing necessary forms for prior-year depreciation claims

In cases where you need to claim depreciation from previous years, your CPA helps prepare:

• Amended tax returns
• Form 3115 (Application for Change in Accounting Method)

A fixed asset policy guides consistent depreciation practices throughout the year. This policy ensures your Profit and Loss statements accurately reflect business performance while maintaining optimal tax positions.

Through proper documentation, efficient software tools and professional guidance, you create a robust system for managing restaurant equipment depreciation. This organized approach simplifies tax preparation, supports financial planning and helps maintain compliance with IRS requirements.

Conclusion

Remember that depreciation rules continue changing, especially regarding bonus depreciation rates. Therefore, staying current with regulations and planning strategically becomes essential for restaurant owners. Through careful asset management, detailed record keeping and professional guidance, you can turn depreciation into a powerful tool for business growth and tax savings.