Individual franchisees and small startup chains, are you dealing with "unfunded mandates" like kitchen oven upgrades this year? Have you purchased new POS terminals for your restaurant? If you have made any large equipment purchases for your restaurant this year, or are still considering doing so by year end, you may be eligible for a substantial tax benefit that was extended in the law earlier this year.
In an effort to incentivize capital improvements, the HIRE Act, passed in March 2010, extended the provision that allows certain businesses to fully deduct the cost of up to $250,000 of equipment purchases made during 2010. Known as the “Section 179 deduction,” this provision allows a current tax deduction for purchases that may have otherwise been depreciable over five years or more. However, time is of the essence, as the maximum benefit is set to be reduced from the current $250,000 level to $25,000 on January 1, 2011. If you think that you may qualify for this tax benefit for 2010, there are several important caveats of which to be aware:
- Taxable income limitation: You may only claim the Section 179 deduction if you have taxable income. The deduction may reduce your taxable income to zero, but cannot create or increase a taxable loss.
- Not for passive investors: The Section 179 deduction may be claimed for a business in which you are actively involved, meaning you personally spend a considerable amount of time running the business. If you are a typical restaurant owner, that requirement should not pose a problem. However, if you have outside investors that do not participate in the business, you may not want to claim the Section 179 deduction because your investors may not be eligible to claim the benefit.
- Limitation on deductions for automobiles and SUVs: Although Section 179 allows a maximum overall deduction of $250,000 for 2010, there are strict limitations on the deductibility of automobiles and SUVs used in your business. Large SUVs, defined as those with gross vehicle weights in excess of 6,000 pounds, are generally limited to a maximum Section 179 deduction of $25,000. The deductions related to smaller passenger automobiles may be even further limited.
- There are several other proposed law changes related to tax benefits for capital improvements that we are keeping a close eye upon. For example, we are still waiting to find out the fate of bonus depreciation, which was the provision that allowed you to claim a deduction for 50 percent of the cost of a new asset, while the remainder was still eligible for Section 179 and regular tax depreciation. The bonus depreciation provision expired in 2009 and has been subject to speculation as to whether it will return for 2010. Check back to this blog for important updates to these proposed changes.
There are several other proposed law changes related to tax benefits for capital improvements that we are keeping a close eye upon. For example, we are still waiting to find out the fate of bonus depreciation, which was the provision that allowed you to claim a deduction for 50 percent of the cost of a new asset, while the remainder was still eligible for Section 179 and regular tax depreciation. The bonus depreciation provision expired in 2009 and has been subject to speculation as to whether it will return for 2010. Another proposed tax law change was mentioned by President Obama in his September 8th speech in Ohio in which he hinted to possible increased tax deductions by businesses for investment in their plants and equipment. Such proposed changes, if enacted, could greatly impact those businesses facing large capital investments. Be sure to check back to this blog for important updates regarding the status of these proposed changes.
If you are in a position to make needed capital improvements for your restaurant, now may be the time. The extended relief under the Section 179 rules may allow you to claim substantial benefits for 2010 that you may not be eligible to claim beginning in January 2011. Ultimately, these tax benefits may help you finance your upcoming equipment purchases, which will enable you to keep your restaurant running smoothly and efficiently into the next year.
Richard Yelton is a principal at Windham Brannon in Atlanta. His specialties include restaurant and hospitality tax, mergers and acquisitions, and more.
Visit him at the Windham Brannon website.