Cost Segregation for Restaurant Owners: 22%+ in 5-Year Property

Restaurant buildings reclassify materially higher than typical commercial — IRS CSATG Ch. 7.6 supports a 22% 5-year personal property baseline, with full-service ranges 25–35% and QSR/chain 35–42%. Worked $1.2M acquisition example, OBBBA 100% bonus, FF&E vs. build-out, and §1245 recapture.

A standalone office building lands around 10–15% reclassification under a typical cost segregation study. A restaurant building lands materially higher. The IRS Cost Segregation Audit Techniques Guide devotes Chapter 7.6 to the restaurant industry specifically because the build-out density is unlike anything else in commercial real estate — kitchen lines, walk-in coolers, hood systems, decorative lighting designed to manage dwell time, dedicated electrical for cooking equipment, plumbing for prep stations and dishwashers, gas piping, vinyl tile and stone flooring chosen for spill resistance, decorative millwork at the bar.

Most of those components are §1245 personal property under the Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997) framework — they are tangible property whose primary function relates to operating the restaurant rather than housing it. That ruling extends across all hospitality and food-service operations and is the legal spine under every restaurant cost-seg analysis since.

TaxProtestTx provides a free feasibility estimator for restaurant property at /cost-seg/?property_use=commercial-restaurant. The numbers below come from the same engine.

Why restaurants reclassify higher than typical commercial

A vanilla commercial office building tends to land at 10–15% reclassification. A restaurant building lands materially higher because almost every interior surface, fixture, and system is purpose-built around the food-service operation rather than the building shell.

The drivers are concentrated in three buckets. First, the kitchen line: hood systems, dedicated 220V circuits for ovens and char-broilers, ansul fire-suppression piping, walk-in cooler refrigeration lines, gas piping for cook-line equipment, dishwashing-station plumbing with grease-interceptor venting. Second, the dining-room finish: decorative lighting, bar millwork, banquette seating, vinyl-tile and stone flooring sized for spill cleaning, decorative ceiling treatments, sound-absorbing wall panels. Third, the operations infrastructure: walk-in cooler/freezer envelopes (pre-fab boxes are §1245 even when bolted to the slab), POS data cabling, kitchen video monitors, decorative signage.

The TaxProtestTx engine uses a 22% / 2% / 10% baseline for restaurant property — 22% 5-year, 2% 7-year, 10% 15-year. That baseline reflects the floor of the CSATG Ch. 7.6 norm range. Full-service restaurants typically run 25–35%; quick-service and chain operations run 35–42%. The engine's 22% bare-form figure is conservative on purpose — a real engineering study that documents the kitchen line item-by-line and adds tenant-improvement / QIP carve-outs typically pushes the figure into the published norm range.

What qualifies as 5-year property in a restaurant build-out

Treas. Reg. §1.48-1 historically described "tangible personal property" as property not an integral part of the building or its operating systems — but interpretation of that phrase against restaurant components has been litigated for decades. The framework today rests on the Whiteco Industries v. Commissioner, 65 T.C. 664 (1975) six-factor permanence test (movability, design intent, removal damage, expected useful life, frequency of replacement, business reason for installation). Every line on the cost-seg engineer's report is defended against that test.

In a typical restaurant the consistent 5-year property includes: decorative interior lighting (chandeliers, sconces, spot lighting on bar shelves), wall-mounted décor and panels, vinyl/laminate millwork at the bar and host stand, kitchen-equipment electrical hookups distinct from the building's main panel, dedicated dishwashing-area plumbing, walk-in cooler/freezer enclosures, hood-system motors, exterior signage and decorative awnings (some 15-yr depending on attachment), POS hardware and data cabling, video-display systems, sound systems. The 7-year category captures the rare specialized industrial equipment that doesn't fit 5-year (some bakery / pizza oven mechanicals).

Pure structural elements — exterior walls, roof, foundation, structural steel, primary HVAC for the dining room — remain 39-year building shell. The hood system serving the cook-line is 5-year. The HVAC system serving the dining room is 39-year. That distinction matters and is one of the most common cost-seg engineer findings on a restaurant audit.

QIP for interior renovation under §168(e)(6)

A restaurant owner who renovates the interior of an existing build-out — replacing the bar, refreshing the dining room, upgrading the kitchen line — falls into the Qualified Improvement Property regime under IRC §168(e)(6). QIP is a 15-year MACRS life with straight-line depreciation, and (critically) it is bonus-eligible.

QIP is restricted to interior improvements made after the building was first placed in service. It excludes enlargements, elevators, escalators, and the internal structural framework. A new bar build is QIP. A kitchen-line refresh is QIP. An addition that pushes the building footprint outward is not — that's a 39-year addition.

Under post-OBBBA 100% bonus, the QIP-eligible portion of an interior restaurant renovation deducts in year one. A $300,000 dining-room refresh on an existing 39-year shell, allocated 100% to QIP under §168(e)(6), produces a $300,000 year-one deduction. The TaxProtestTx engine's renovation classifier (Phase J) treats commercial kitchen and addition renovations as 100% to QIP under §168(e)(6); see the renovation cost-seg add-on article for the per-row mapping.

100% bonus depreciation interaction under OBBBA

The One Big Beautiful Bill Act §70301 (Pub. L. 119-21, signed July 4, 2025) restored 100% bonus depreciation for property acquired after January 19, 2025. A restaurant acquisition closing on or after that date has the entire reclassified 5-yr / 7-yr / 15-yr bucket eligible for full year-one deduction. Property acquired earlier (in the TCJA phase-down window) is stuck at the lower historical rate — 60% for 2024, 40% for early-2025, 80% for 2023, 100% for 2017–2022.

For deeper treatment of the OBBBA mechanics including the day-level inflection point, see /cost-seg/articles/obbba-bonus-depreciation-2026. The TaxProtestTx engine encodes the inflection date directly per IRS Notice 2026-11 — entering the actual purchase month and year picks the right rate automatically.

Worked example — $1.2M restaurant acquisition, 22% reclassification

A restaurant operator purchases a freestanding 4,500-square-foot building in 2026 for $1.2M to operate a full-service dinner concept. Land is appraised at $200,000. Depreciable basis is $1.0M. The operator holds in a single-member LLC taxed as a partnership and is in the 32% federal marginal bracket.

Using the restaurant baseline allocation:

• 5-year personal property (22%): $220,000
• 7-year property (2%): $20,000
• 15-year land improvements (10%): $100,000
• Total accelerable: 34% = $340,000
• 39-year building shell (66%): $660,000

Under 100% bonus depreciation (IRC §168(k) post-OBBBA), the entire $340,000 accelerable bucket is deductible in 2026. The 39-year building shell on $660,000 generates approximately $9,000 of mid-month straight-line depreciation in year one.

Estimated year-one depreciation: ~$349,000. At a 32% federal marginal bracket, estimated ~$112,000 year-one federal tax effect. State tax effect varies; Texas has no individual income tax, so a Texas-resident operator would not see a state-level benefit on the personal return. Results are not guaranteed and depend on the operator's specific facts, the actual cost segregation engineering, passive activity loss limitations under IRC §469 (the operator's material participation in the restaurant operation is the gating question), and basis limitations under §704(d) / §1366(d).

Run the same numbers with your own purchase price at /cost-seg/?property_use=commercial-restaurant&purchase_year=2026. A real engineering study with FF&E receipts, kitchen-line line-items, and TI/QIP carve-outs typically pushes the reclassification several points higher into the CSATG norm range.

FF&E vs. build-out — what's already on the operator's books

Restaurant operators often already own significant restaurant equipment outside the real-estate basis: cook-line equipment, walk-in racks, bar glassware, POS terminals, kitchen smallwares. Those items are typically already on the operator's depreciation schedule as 5-year personal property under their own §168 classification, separate from the real-estate cost segregation. The cost-seg study addresses the real-estate basis only — the things that would convey with the building if the operator sold the real estate to a third party.

The line gets blurry on built-in equipment. A bolted-down dishwasher with hard-piped plumbing is part of the real estate. A roll-in dishwasher on casters is FF&E. A walk-in cooler with a pre-fab box bolted to the slab is real estate (§1245 personal property). A modular cooler that disassembles for transport is FF&E. The cost-seg engineer's report draws the line property by property; the operator's CPA and engineer should reconcile against the operator's existing fixed-asset schedule before filing to avoid double-counting.

§1245 recapture if you sell the restaurant

Restaurant real estate has an unusual exit pattern. Operators sell to other restaurant groups, to landlords who continue the lease, or to commercial-redevelopment buyers who plan a different use. Each of those exits triggers different recapture mechanics, but all of them implicate §1245 on the reclassified portion.

IRC §1245(a)(1) recharacterizes accumulated depreciation on §1245 property as ordinary income on disposition, up to the lesser of accumulated depreciation or gain realized. The reclassified 5-year, 7-year, and 15-year buckets from a cost-seg analysis are §1245 property under the Hospital Corp. of America framework. The 39-year building shell is §1250 property — different recapture regime, generally taxed at the 25% unrecaptured §1250 rate rather than ordinary rates.

The math: an operator who took $340,000 of accelerated deductions in 2026 and sells the building in 2029 for a $250,000 gain over adjusted basis will see most of that gain recharacterized as ordinary income (capped at the gain), taxed at the operator's marginal bracket — potentially 32% rather than the 20% long-term capital gain rate. The cost-seg deduction is not erased, but the rate arbitrage between accelerated depreciation at 32% and recapture at 32% is zero. The benefit reduces to the time value of money on the deferral.

For a long hold (10+ years), the time-value-of-money benefit is meaningful. For a short hold (3–4 years, typical for a restaurant flip), the recapture can erase much of the year-one cash benefit. See /cost-seg/articles/cost-segregation-recapture-1245-trap for the full disposition mechanics.

§469 passive-activity gating for the operator-owner

If the operator materially participates in the restaurant under any of the seven §469(h) tests — typically the "more than 500 hours" test, easily met by an operator running the restaurant — the rental of the real estate to the operating entity is recharacterized as nonpassive under Treas. Reg. §1.469-2(f)(6) (the self-rental rule). That recharacterization is generally good for cost-seg: it lets the year-one bonus depreciation deduction offset the operating entity's nonpassive income rather than getting trapped as a suspended passive activity loss.

A passive investor who buys restaurant real estate and triple-net leases it to an unrelated operator does not benefit from the self-rental rule. The deduction is passive and offsets only passive income, with the excess suspended under §469(d)(1) until disposition. This is the most common reason a pure-investor cost-seg fails to deliver the marketed cash benefit. See /cost-seg/articles/real-estate-professional-status-reps-cost-segregation for the REPS framework that some passive investors use to reclassify their rental losses as nonpassive.

Run an estimate

The TaxProtestTx feasibility estimator runs the restaurant allocation against any purchase price, year, and bracket. It cites the IRS CSATG Ch. 7.6 restaurant baseline and shows the year-one tax effect under current OBBBA rules.

Run a restaurant estimate →

The estimator is not a cost segregation study under Treasury Circular 230 and cannot be relied on as tax advice. It is a screening tool. An operator whose estimate looks favorable should engage a qualified CPA and cost segregation engineer before filing — typically a fixed-fee study runs $5,000–$15,000 for a restaurant building, and the engineer's report is the document that supports the deduction under audit.

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Sources

• IRS Cost Segregation Audit Techniques Guide, Ch. 7.6 — Restaurant Industry. https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-7-6-restaurants
• IRC §168(c) — Recovery period for nonresidential real property (39 years).
• IRC §168(e)(6) — Qualified Improvement Property definition.
• IRC §168(k) — Bonus depreciation, restored to 100% by One Big Beautiful Bill Act §70301, Pub. L. 119-21 (July 2025).
• IRC §1245(a)(1), §1245(a)(3) — Recapture of depreciation on §1245 property.
• IRC §469 — Passive activity losses; Treas. Reg. §1.469-2(f)(6) self-rental rule.
• IRC §704(d), §1366(d) — Basis limitations for partnership and S-corp owners.
• Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997) — Seminal case on §1245 personal property in commercial facilities.
• Whiteco Industries v. Commissioner, 65 T.C. 664 (1975) — Six-factor permanence test.
• IRS Publication 946 — How to Depreciate Property.
• Rev. Proc. 87-56 — Class lives and recovery periods.
• IRS Notice 2026-11 — OBBBA bonus depreciation transition rules.

Disclaimer

Disclaimer. This article describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.