Depreciation is an annual operating expense and tax deduction for the useful life of property. Property can best be described as furniture, equipment, POS systems and improvements to your leased building. Businesses may depreciate property for both tax and book purposes (Generally Accepted Accounting Principles), and there are different methodologies for each.
For book purposes, the rate of depreciation must be consistent with the expected useful life of the property. For tax purposes, businesses are able to deduct a larger percentage of the cost of the asset in the initial years of investment as a depreciation deduction, and this often encourages capital investment as the investment in property will generate immediate tax savings.
A unique set of depreciation rules applies to the restaurant industry. While the restaurant building itself must be depreciated over 39 years, non-structural improvements and equipment may be depreciated over a much shorter life, reducing your tax liability and encouraging ongoing investment. It is important for restaurant owners to review their equipment, furnishings, and accessories to determine the appropriate useful life and maximize their depreciation deductions.
Additionally, existing restaurants that meet certain criteria may now take advantage of the smallwares method of accounting. Restaurant owners may take a current deduction in the year of purchase for items such as glassware, silverware, and tableware, even if the items are used for more than one year. This eliminates the burden of accounting for every knife, plate, or food container over their lifetime. In the past it was necessary to capitalize and depreciate these items, creating an administrative burden for restaurant owners as it was necessary to implement a tracking system to insure these items were properly accounted for.
Retail Financial Works recommendation:
It is well worth your time as a restaurant owner to review the area of depreciation annually to maximize savings. As busy as you are growing your business, monitoring food and labor costs and attending to the rest of your never ending to-do list, the return on your investment can be a substantial tax savings.
Contact Ed Williams, CPA for more information at (770) 650-0103 ext. 102 or via email at firstname.lastname@example.org. And for tax questions any time, email us at email@example.com.