What Is Qualified Restaurant Property?

For restaurant owners and real estate investors, understanding specific tax provisions can impact financial outcomes. Qualified Restaurant Property (QRP) is a commercial real estate classification that carries specific tax implications, allowing for accelerated depreciation. This offers a method to reduce taxable income more quickly than is possible with other types of commercial buildings.

Defining Qualified Restaurant Property

The primary requirement for a building to be considered Qualified Restaurant Property is that more than 50% of its total square footage must be dedicated to the preparation of meals and seating for on-premises consumption. This definition, outlined in the Internal Revenue Code, focuses on the building’s primary use. It applies to the entire structure, whether it is newly constructed for restaurant use or an existing building that has been purchased and repurposed.

This specific use test creates a clear line between properties that qualify and those that do not. For instance, a traditional sit-down restaurant, a fast-food establishment, or a diner would meet the criteria because the majority of their floor plan is used for kitchen operations and customer dining areas. These businesses are centered around the on-site consumption of prepared food, aligning directly with the statute’s language.

Conversely, many establishments that sell food do not meet the 50% threshold. A grocery store, for example, would not qualify because even though it may have a prepared food counter, the vast majority of its square footage is dedicated to retail shelving for groceries. Entertainment venues like bowling alleys or movie theaters that serve food as an ancillary part of their business also fall outside the definition, as their primary function is not meal service.

Tax Treatment and Depreciation

The main financial advantage of a property qualifying for this treatment is its favorable depreciation schedule. Under the General Depreciation System (GDS), such property is assigned a 15-year recovery period. This is a significant acceleration compared to the standard 39-year recovery period applied to most other nonresidential commercial buildings, allowing owners to take larger depreciation deductions each year.

Depreciation is calculated using the straight-line method, meaning the cost of the property is deducted in equal amounts over the 15-year period. For example, if a qualifying restaurant building costs $1,500,000 (excluding land value), the annual straight-line depreciation deduction would be $100,000. In contrast, if the same building were treated as standard 39-year nonresidential property, the annual deduction would be only approximately $38,462.

The 15-year classification makes the property eligible for bonus depreciation, which allows a business to deduct a large percentage of an asset’s cost in the first year it is placed in service. For property placed in service in 2025, the rate is 40%. This rate is scheduled to decrease to 20% in 2026 before being eliminated in 2027, unless Congress enacts new legislation.

Using the previous example, if a restaurant owner placed a $1,500,000 qualifying property in service in 2025, they could potentially claim a bonus depreciation deduction of $600,000 in the first year alone. The remaining $900,000 basis would then be depreciated over the 15-year life of the property. This immediate, large deduction is a tool for managing tax liability in the year of acquisition or construction.

Relationship with Qualified Improvement Property

The tax classification for restaurant properties has evolved. While the term “Qualified Restaurant Property” (QRP) was once a distinct category, tax law changes have consolidated it into a broader classification called Qualified Improvement Property (QIP).

The Tax Cuts and Jobs Act of 2017 (TCJA) aimed to simplify depreciation by creating the QIP category, which absorbed previous classifications for qualified leasehold, retail, and restaurant improvements. However, a drafting error in the TCJA incorrectly gave QIP a 39-year recovery period, which made it ineligible for bonus depreciation.

This error was corrected by the CARES Act in 2020. The fix retroactively assigned QIP a 15-year recovery period, making it eligible for bonus depreciation. As a result, a building that meets the “more than 50% use” test for a restaurant is now technically classified as QIP and is treated as having a 15-year life.

Claiming the Depreciation Deduction

Once a taxpayer determines their property qualifies, the deduction must be properly reported on their tax return. The primary document for this purpose is IRS Form 4562, Depreciation and Amortization. This form is filed alongside the business’s main income tax return, such as a Schedule C for a sole proprietor or Form 1120 for a corporation.

The specific section for reporting this type of depreciation is Part III, titled “MACRS Depreciation.” In this section, the taxpayer lists the qualified property, its cost or other basis, the date it was placed in service, and the 15-year recovery period. The form guides the calculation of the depreciation deduction for the current tax year based on the straight-line method.

If claiming bonus depreciation, that calculation is handled in Part II, “Special Depreciation Allowance.” A taxpayer would first calculate and report the bonus amount in this section for the year the property is placed in service. The remaining basis of the property is then carried over to Part III to be depreciated over the standard 15-year recovery period.