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Public Policy Issue Briefs
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Issue: Restaurant Depreciation
Overview: The National Restaurant Association supports permanently shortening the depreciation schedule for restaurant buildings to 15 years to promote economic growth for the industry and nation.
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Background
Depreciation schedules for commercial real estate have not been significantly revised since they were established decades ago. The federal tax code generally allows business owners to depreciate original building costs over a 39 1/2-year depreciable life. The same timeline applies to costs for renovations or improvements to buildings.
Congress has changed the rules for some industries, including some businesses that compete with restaurants. For example, convenience stores attached to gas stations qualify for a 15-year schedule.
Congress has made some changes to restaurant depreciation schedules over the past few years, but the changes have been temporary. Most recently, Congress passed a law in the fall of 2008 that allows for 15-year depreciation schedules through the end of 2009. The provision applies to renovations or improvements placed in service in 2008 and 2009, as well as to new construction placed in service in 2009.
This is a major victory for the restaurant industry as new construction has never been included before.
The measure's benefits extend both to restaurants that own their locations as well as to restaurants that lease space within other buildings. The 2008 law also clarifies that remodeling projects that require changes to structural walls meet the definition of "new construction" and qualify for the 15-year schedule if put into place in 2009.
These provisions are temporary and should be extended beyond 2009 as it will have a positive impact on construction spending in the restaurant industry. By shortening the depreciation schedule, Congress gives operators cash flow to reinvest in their businesses.
While capital expenditures have been down in the last year due to the overall state of the economy, restaurateurs are beginning to plan to make these expansions again. The National Restaurant Association conducts a monthly tracking survey that asks operators if they made a capital expenditure during the previous three months, and if they plan to make a capital expenditure in the next six months.
• During strong economic periods, roughly 55 percent of restaurant operators make a capital expenditure for equipment, expansion or remolding in the previous three months. June 2009 survey: an average of 38 percent of restaurateurs expanded or remodeled their business in last 3 months.
• Typically, 60 percent of restaurant operators’ report that they plan to make a capital expenditure for equipment, expansion or remodeling in the next six months. June 2009 Survey: about 40 percent of restaurateurs plan to make a capital expenditure in the next 6 months.
Legislation
On January 7, 2009 Congressmen Kendrick Meek (D-FL-17) and Patrick Tiberi (R-OH-12) reintroduced legislation that would make permanent the 15 year schedule for restaurant improvements and new construction (H.R. 273).
Why Support a 15-Year Depreciation Schedule?
• Shorter depreciation schedules fuel economic activity. When restaurants invest in construction and renovations, the impact spreads through the economy. According the U.S. Census Bureau data, restaurants spent $10.4 billion on new construction in 2007, fueling economic activity and creating thousands of jobs in construction-related industries. This spending creates an even bigger ripple effect. The Bureau of Labor Statistics estimates that every $1 spent on construction generates another $2.39 in economic activity; every $1 million spent in the construction industry creates more than 28 jobs in overall economy.
• A faster, more accurate depreciation schedule has a direct impact on a restaurant’s bottom line. By shortening the depreciation schedule, Congress gives operators cash flow to reinvest in their businesses, allowing them to expand restaurant jobs and contribute to the community. In an industry with median profit margins of 3 to 5 percent, every penny counts.
• 15 years is the right depreciation schedule for restaurant buildings. With 133 million Americans patronizing restaurants each day, restaurant building structures experience a daily human “assault” unlike that borne by any other type of retail building. Restaurateurs must constantly make changes to keep up with the structural and cosmetic wear and tear caused by customers and employees. The heavy use accelerates deterioration of a restaurant building’s entrance, lobbies, flooring, restrooms and interior walls. National Restaurant Association research shows that most restaurants remodel and update their building structures every six to eight years.
Questions?
Contact Michelle Reinke at mreinke@restaurant.org or Dave Koenig at dkoenig@restaurant.org.
Related Association news releases
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[October 22, 2009]
National Restaurant Association Fights for Tax Provision to Help Restaurants Expand, Remodel
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