The U.S. House and Senate are considering bills that would put in place a 15-year tax depreciation schedule for restaurant improvements and new construction, leasehold improvements and retail improvements. If the legislation passes Congress and is signed by President Obama, it would mean the end of the uncertainty that has led restaurant operators across the country to put improvement projects on hold while they awaited word on the tax treatment of the projects.
Historically, Congress has renewed the 15-year depreciation schedule every year or two, but partisan battles last year delayed renewal until just before the year ended and only applied retroactively for 2014. Without action, improvements and new construction will be subject to a 39.5-year depreciation schedule.
National Restaurant Association (NRA) research shows that a 15-year depreciation schedule is more in line with reality for restaurant operators. A 2014 NRA survey of 1,000 restaurateurs found that a majority of restaurant operators said it was necessary to renovate or remodel their dining areas and kitchens a median of every five years. Only eight percent of restaurant operators said they could wait more than 10 years to renovate or remodel their kitchen area, while just six percent said they could wait more than 10 years to improve their restaurant’s dining area.
The issue has bipartisan support, with bills being introduced in the Senate by Sens. Bob Casey (D-Pa.) and John Cornyn (R-Texas) and in the House by Reps. Mike Kelly (R-Pa.) and Richard Neal (D-Mass.). The latest 15-year depreciation schedule expired at the end of 2014. Both the House and Senate are most likely to vote on permanent extension of the 15-year schedule as part of a larger package of tax provisions.
The economic benefits of a 15-year depreciation schedule are felt well beyond the walls of restaurants. NRA research conducted in 2012 found three in 10 restaurateurs had delayed renovation and construction projects because they weren’t sure how those projects would be taxed. Those projects stood to generate $23 billion in economic activity and create 200,000 jobs across construction and other industries.
Typical renovations eligible for the 15-year depreciation schedule include the building shell, electrical system, fire protection systems, lighting, security systems, ceramic tile, HVAC, plumbing, and restroom fixtures and accessories.