PROPERTY CLASS

Cost Segregation for Restaurant Properties

TYPICAL RECLASS

30.5%

IQR 28-33% · n = 31

Cost Segregation for Restaurant Properties

Restaurants reclassify aggressively. Kitchen equipment, exhaust and ventilation systems, decorative finishes, specialty lighting, and tenant-build interiors all classify as 5-year personal property. The 5-year bucket alone typically clears 20% of basis — roughly double what it does in a comparable-basis office building. Quick-service, fast-casual, and full-service operations each have distinct component mixes, but all three fall in the 28–33% accelerated range.

Reclass benchmark for restaurants

Across the Cost Seg Smart engineered analysis dataset, restaurant properties reclassify a median of 30.5% of the depreciable basis into accelerated buckets. The IQR across 31 restaurant analyses is 28–33%.

Bucket	Median % of basis
5-year (Section 1245 personal property)	21.7%
7-year (Section 1245 specialty)	1.4%
15-year (Section 1250 land improvements)	7.5%
39-year (Section 1250 structural)	69.4%

The 5-year bucket dominates because nearly every component above the structural shell qualifies. The 15-year bucket is smaller than retail because restaurant pads are typically smaller (less parking, less landscaping relative to building basis).

What gets reclassified in a restaurant property

5-year personal property (Section 1245):

Commercial kitchen equipment (ranges, ovens, walk-in coolers, walk-in freezers, fryers, prep tables)
Exhaust hoods, makeup air units, kitchen ventilation
Refrigeration, ice machines, dishwasher booster heaters
Bar equipment (beer systems, ice wells, three-compartment sinks)
POS systems, kitchen display systems, audio/visual
Specialty plumbing (grease traps, gas piping for kitchen equipment, water filtration)
Decorative interior partitions, booths, banquettes (if removable)
Decorative lighting (pendants, accent, dimmer systems)
Wall coverings, decorative tile, specialty flooring (non-permanent)
Window treatments
Dedicated HVAC zones for kitchen and dining

7-year specialty (Section 1245):

Built-in bar back, host stand, server station casework
Custom-millwork features

15-year land improvements (Section 1250):

Parking lot (asphalt, striping, curbs)
Outdoor dining patios (if not part of the permanent structure)
Site lighting, monument signs
Landscaping, irrigation
Sidewalks, ADA approaches
Outdoor cooking platforms, exhaust extensions for outdoor kitchens

39-year structural (Section 1250):

Building shell, foundation, roof structure
Base building HVAC (rooftop units serving the whole building)
Structural plumbing service entrance
Permanent walls structural to the building
Fire suppression infrastructure

Restaurants are the property type where the 5-year bucket most consistently clears 20%. Where the engineered analysis identifies otherwise, the cause is typically a fast-casual or QSR with a smaller kitchen footprint relative to dining space.

Engineered analyses of restaurant properties

Three representative analyses from the Cost Seg Smart engine:

Small scope — QSR with drive-through, Nashville TN — 4,500 SF, $1.1M acquisition. Year-1 federal savings at 37%: $102,034.
Mid scope — casual dining standalone, Denver CO — 8,000 SF, $2.8M acquisition. Year-1 federal savings: $247,258.
Large scope — destination restaurant, Las Vegas NV — 22,000 SF, $9.4M acquisition. Year-1 federal savings: $829,474.

All three assume 100% bonus depreciation (OBBBA 2025), top federal bracket, and accelerated buckets taken fully in year 1.

Audit considerations for restaurants

The IRS Cost Segregation Audit Techniques Guide includes Chapter 7.2 specifically for restaurants. Key examination focus areas:

Kitchen equipment vs structural plumbing: A commercial range is 5-year personal property. The gas piping running through the wall to the range is also 5-year if it’s dedicated to the kitchen and removable. The audit will trace each piping run.
Grease traps and waste systems: A grease trap interior to the building, serving the kitchen, is 5-year. An exterior grease interceptor that’s part of the site sanitary system may be 15-year. The plumbing diagram resolves it.
Exhaust hoods and makeup air: Kitchen exhaust hoods are 5-year personal property. The roof curb and structural penetration the exhaust passes through are 39-year. The component split must be defensible.
Decorative vs functional lighting: Pendant lights over the bar are 5-year decorative. Recessed cans providing general illumination as base electrical are 39-year. The lighting plan and circuit schedule resolve which is which.
Outdoor dining structures: A permanent enclosed patio is 39-year structural. A removable outdoor seating arrangement on a paved surface is part of the 15-year site work. A pergola or retractable cover sits between — the engineering documentation must place it.

How a restaurant study is conducted

The engineered methodology applies six steps tailored to restaurants:

Property scoping: kitchen-to-dining ratio, service format (QSR / fast-casual / casual / fine-dining / destination), year built
Land valuation: county assessor record where reliable; statistical metro/state ratios otherwise
Component inventory: kitchen equipment line items, bar equipment, dining buildout, specialty plumbing and electrical, exterior site
Cost allocation: RSMeans 2024 + PPI time index, with restaurant-specific component weighting for kitchen density
Classification: each component to its MACRS bucket under Section 168
Reconciliation: total reconciles to depreciable basis to the penny

FAQ

How much does a restaurant cost segregation study cost?

Restaurant studies typically range $2,500–$8,500. A small single-unit QSR sits at the low end; a destination restaurant with extensive build-out at the upper end.

Does cost segregation work for a restaurant I lease to an operator?

Yes — the property owner captures the depreciation, regardless of whether the operator is the same entity. NNN restaurant leases are common cost-seg candidates because the income is stable and the depreciation deduction directly offsets it.

What about kitchen equipment I purchased separately?

Equipment purchased and installed by the property owner is part of the property’s depreciable basis and included in the cost segregation study. Equipment purchased by the tenant-operator is not — that’s the tenant’s deduction.

Can I do cost segregation on a restaurant build-out I’m planning?

Yes — a pre-construction cost segregation review identifies the optimal classification of planned components, so the construction accounting maps directly to the depreciation schedule. This is the cleanest approach.

How does cost segregation interact with a triple-net (NNN) restaurant lease?

The landlord captures the depreciation. NNN lease structure doesn’t change the property’s MACRS classifications or the engineering methodology.

What if I acquired the restaurant several years ago?

Section 481(a) catch-up depreciation lets you take all previously-missed accelerated depreciation in the current year. Form 3115 is filed; no amended returns required.

Does cost segregation make sense for a small QSR?

At $1.1M basis (the small-scope analysis above), the engineered study identifies $275,768 in accelerated buckets, producing $102,034 in year-1 federal savings at a 37% bracket. After a $2,500 study fee, year-1 ROI is 40×.

Are there restaurant property types where the strategy doesn’t work?

Properties on ground leases where the lessee owns only the building (not the land) still qualify; the land value just isn’t in the basis. Operating leases where the lessee doesn’t own the building disqualify the lessee from cost segregation on that property.