How Does Restaurant Equipment Depreciation Work?

Depreciation is an accounting method allowing a business to deduct an asset’s cost over its useful life to account for wear and tear. For a restaurant, this means gradually expensing equipment as it loses value. The primary function of recording depreciation is to lower the business’s taxable income each year, resulting in a smaller tax liability.

Identifying and Classifying Depreciable Restaurant Assets

For an asset to be depreciable for tax purposes, it must meet three requirements set by the IRS. First, the business must own the property. Second, it must be used in the business to produce income. Third, the asset must have a determinable useful life of more than one year. Land, for instance, is not depreciable because it is considered to have an unlimited useful life.

Restaurant assets are categorized into different groups:

• Kitchen equipment: Ovens, fryers, walk-in freezers, and dishwashers.
• Front-of-house assets: Tables, chairs, booths, bar stools, and point-of-sale (POS) systems.
• Back-office assets: Computers, printers, desks, and office furniture.

The Internal Revenue Service (IRS) assigns a “recovery period” to different types of property, which dictates how many years a business can take depreciation deductions. Items like appliances, furniture, and fixtures are classified as 5-year property. Office equipment and furniture, such as computers and desks, are considered 7-year property.

The Standard Depreciation Method (MACRS)

The standard method for calculating depreciation for tax purposes is the Modified Accelerated Cost Recovery System (MACRS). This system allows for larger tax deductions in the earlier years of an asset’s life and smaller deductions in the later years. This “accelerated” schedule can help improve a restaurant’s cash flow by reducing taxable income more significantly upfront.

MACRS is divided into two subsystems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the more common of the two and is used for most types of property. It uses accelerated depreciation methods to calculate deductions. ADS provides for a straight-line method of depreciation over a longer recovery period, which a business may elect to use, which can be advantageous for businesses expecting to be in a higher tax bracket in the future.

A key component of MACRS calculations involves applying the correct “convention,” which determines the number of months you can depreciate an asset in the year you place it in service. The half-year convention is the most common, treating all property placed in service during a year as if it were placed in service in the middle of that year. This means you can only claim a half-year’s worth of depreciation in the first year.

A different rule, the mid-quarter convention, must be used if the total cost of qualifying property placed in service during the last three months of the tax year exceeds 40% of the total cost of all qualifying property placed in service during the entire year. For example, if a restaurant owner buys a $10,000 oven (5-year property), the GDS with a half-year convention would apply. Using the IRS-provided percentage tables for 5-year property, the first-year depreciation would be 20% of the cost, or $2,000.

Accelerated Depreciation Options

Section 179 Expensing

Section 179 of the tax code allows a business to treat the cost of qualifying property as an expense and deduct the full purchase price in the year it is placed in service. This provides an immediate reduction in taxable income. Qualifying property is tangible personal property like machinery and equipment purchased for use in the business.

There are limits to this deduction. For the 2025 tax year, the maximum amount a business can expense under Section 179 is $1,250,000. This deduction begins to phase out for businesses that place more than $3,130,000 of qualifying property into service during the year. Another limitation is that the total Section 179 deduction cannot exceed the business’s net taxable income for the year.

Bonus Depreciation

Another accelerated option is bonus depreciation. This incentive allows businesses to immediately deduct a percentage of the cost of eligible assets in the first year. Unlike Section 179, there is no annual dollar limit or income limitation, making it particularly useful for large capital expenditures or for businesses that might have a net loss for the year. Both new and used property can qualify for bonus depreciation.

The Tax Cuts and Jobs Act of 2017 initially set bonus depreciation at 100%, but this provision is being phased out. For qualified property placed in service in 2025, the bonus rate is 40%. The rate is scheduled to decrease to 20% in 2026 before being eliminated. A restaurant owner can elect out of bonus depreciation, but it is an automatic provision unless they formally choose not to take it.

Special Rules for Restaurant Improvements

Restaurants often undergo renovations and remodeling, and there are specific tax rules for these types of expenditures. An important category is Qualified Improvement Property (QIP). QIP is defined as any improvement made by the taxpayer to the interior portion of a nonresidential building that has already been placed in service. This includes projects like remodeling a dining area, reconfiguring a kitchen layout, or installing new interior lighting and plumbing systems. It does not, however, include enlargements to the building, elevators, or the internal structural framework.

For federal income tax purposes, QIP is assigned a 15-year recovery period and depreciated using the straight-line method. This is an advantage compared to the standard 39-year period for nonresidential real property, as the shorter life allows for quicker cost recovery.

A primary benefit for restaurant owners is that QIP is eligible for bonus depreciation. This means a restaurant can potentially deduct a large percentage of the cost of a major interior renovation in the first year. For example, a restaurant that spent $100,000 on a dining room remodel in 2025 could take a $40,000 bonus depreciation deduction in the year of the renovation.

Reporting Depreciation and Asset Disposals

All depreciation deductions are calculated and reported to the IRS on Form 4562, Depreciation and Amortization. This form is filed along with the restaurant’s annual income tax return. The form is divided into several parts to handle the different types of deductions. For instance, Part I is used to report Section 179 expensing, while Part II is used for bonus depreciation, and Part III is for MACRS depreciation.

A business must maintain detailed records for each asset, including its cost, the date it was placed in service, and the depreciation method used. These records are necessary to accurately complete Form 4562 and to substantiate the deductions if the IRS ever conducts an audit.

When a restaurant sells or scraps a piece of equipment, the event must be reported for tax purposes. If an asset is sold for more than its depreciated value (its book value), the resulting gain may be subject to tax. This is known as “depreciation recapture.” The portion of the gain that is due to the depreciation deductions taken in prior years is generally taxed as ordinary income, not at the lower capital gains rate. This rule prevents business owners from converting ordinary income into capital gains by depreciating an asset and then selling it for a profit.