Cost Segregation for Restaurants: What Qualifies and What Doesn't

A restaurant is not one asset for depreciation purposes. It's a kitchen full of 5-year equipment sitting inside a 39-year shell, wrapped in decor that may or may not be structural, sitting on a 15-year parking lot. A cost segregation study separates those layers — and for restaurants, the layers that move into shorter recovery periods are unusually large.

This guide covers what qualifies, what doesn't, and the decorative-vs-structural distinction that makes or breaks a restaurant study. Every tax rule below is cited to its source. Run your numbers by your CPA before filing anything.

Why restaurants reclassify so well

Most commercial buildings reclassify 20–40% of their depreciable basis into shorter-lived property (see our reclassification percentages reference). Restaurants run far higher, because a restaurant is half industrial kitchen, half themed dining room — both packed with personal property.

National Tax Group puts restaurants and car washes at 50–100% reclassification in their 2025 property-type band [1]. That is the most aggressive published band in the industry and it's their estimate, not IRS guidance — the IRS publishes classification rules, not percentages. Other published datasets land lower for restaurants (Seneca Cost Segregation: 23–40%; Cost Seg Smart's study data: 16–29% [2]), which tells you the real answer is "it depends on the site." A quick-service build-out with a full kitchen and drive-through lands near the top. A plain vanilla space with a landlord-funded shell lands near the bottom. The components below are where the number actually comes from.

5-year property: the kitchen and the bar

Five-year property is Section 1245 personal property — assets used in the business that aren't part of the building structure. In a restaurant, this is the kitchen, the bar, and the systems that serve them:

• Cooking equipment: ovens, ranges, fryers, grills, steamers, warming equipment
• Refrigeration: walk-in coolers and freezers, reach-in units, ice machines
• Hoods and exhaust: ventilation hoods with dedicated ductwork serving the cooking line
• Beverage equipment: espresso machines, draft beer systems, soda fountains, blenders
• POS and control systems: point-of-sale terminals, kitchen display systems, sound and lighting control panels
• Freestanding bars and millwork: bars, back bars, and host stations not tied into the building structure

The IRS Cost Segregation Audit Techniques Guide publishes industry-specific classifications for restaurants under asset class 57.0 (Distributive Trades and Services). Its test for what's personal property vs. building comes down to function: items that serve the restaurant's theme or operations rather than the building itself. We'll come back to exactly how the ATG phrases that test in the next section.

One more thing that matters in 2026: with 100% bonus depreciation permanently restored, everything in this 5-year bucket is generally deductible in Year 1. The One Big Beautiful Bill Act (signed July 4, 2025) permanently restored 100% bonus for qualifying property acquired and placed in service after January 19, 2025 — no phase-down, no expiration under current law. IRS Notice 2026-11 (issued January 14, 2026) provides the implementation guidance, including the acquisition-date rule: property under a written binding contract entered into before January 20, 2025 stays on the old phase-down rates [3]. Read our 2026 bonus depreciation guide for the full mechanics.

Decorative vs. structural: the rule that decides the savings

This is the section that decides how much of a restaurant study lands in the short-life buckets. Restaurants spend heavily on finishes that look like building — walls, ceilings, millwork — but function as branding. The ATG's restaurant directive gives the exact test: decorative millwork is "the decorative finish in the restaurant," including detailed crown moldings, lattice work placed over finished walls or ceilings, cabinets and counters — items that "serve to enhance the overall theme of the restaurant and are not related to the operation of the building." Those classify as 5-year Section 1245 property [4].

General millwork — doors and frames, window frames, stairways, panel work that is part of the building — stays 39-year. Note the trap the ATG sets: cabinets and counters in a restroom are excluded from the decorative classification and stay building property. Same material, different function, different answer.

In plain language, the test is: does this item exist because it's a restaurant, or would it be here in any building? Items that pass the restaurant test:

• Themed decor, artwork, and wall treatments that create the dining atmosphere
• Specialty and decorative lighting (pendants, sconces, accent fixtures)
• Booths and banquettes that aren't structural
• Themed signage and menu boards inside the space
• Audio/visual systems and decorative ceiling treatments

What stays 39-year: foundation, framing, roof, load-bearing walls, structural floors, and core building systems. The structural shell is still the structural shell. A study that reclassifies structural components as personal property is an audit problem, not a tax strategy.

Where this gets uncertain: the line between "themed millwork" and "building finish" is genuinely fact-specific, and it's the category the IRS scrutinizes most in cost segregation audits. This is exactly why restaurant studies need engineering documentation — photos, drawings, and a written rationale for each classification — rather than a spreadsheet of percentages. If your site has heavy themed finishes, that's where the savings live, and it's also where the documentation has to be airtight.

If you want to know what your specific build-out would qualify for, get a free estimate — it takes five minutes and there's no commitment.

15-year property around the site

Land improvements — everything outside the building footprint — classify as 15-year property under Section 1250, and for restaurants this bucket is often bigger than owners expect:

• Parking lot paving, striping, curbs, and wheel stops
• Drive-through lanes, canopies, and order/menu boards (site-mounted)
• Monument, pylon, and building-mounted signage
• Lot lighting, bollards, and site electrical serving the lot
• Landscaping, irrigation, fencing, and retaining walls

The bonus question: 15-year property has a recovery period of 20 years or less, which makes it qualified property under Section 168(k) — so yes, it's bonus-eligible [5]. Under OBBBA, site work acquired and placed in service after January 19, 2025 gets the permanent 100% bonus. For a restaurant with a big lot and a drive-through, the 15-year bucket alone can be six figures of Year-1 deductions.

One important carve-out: the land itself never depreciates. The 15-year bucket is improvements to the land, not the land.

Leasehold improvements: who owns the tax benefit?

Many restaurant operators lease their space and fund the build-out themselves — the tenant improvement allowance rarely covers a full kitchen. Who paid for and owns the improvements determines who gets the depreciation.

Tenant-funded improvements you own may qualify as qualified improvement property (QIP): improvements to the interior of a nonresidential building, placed in service after the building was first placed in service. QIP carries a 15-year recovery period (the CARES Act fixed the old "retail glitch" retroactive to property placed in service after December 31, 2017), which makes it bonus-eligible — and under OBBBA, QIP acquired and placed in service after January 19, 2025 gets permanent 100% bonus [6]. Improvements to leased space can qualify as QIP even when there's a lease involved, provided the lease isn't between related parties [6]. Landlord-funded improvements are part of the building. If the landlord paid for the HVAC, the storefront, or the base building shell, those are 39-year property on the landlord's return — the tenant can't study what the tenant doesn't own.

Two QIP rules that trip people up:

It must be an improvement to an existing building. Interior work completed during initial construction doesn't qualify as QIP — QIP only applies to improvements placed in service after the building was first placed in service [6].

Structural work is excluded. Interior structural framing, building enlargements, and elevators/escalators are not QIP [6].

Before claiming anything on a leased space, a study needs to document which improvements you actually own. "The landlord gave me a TI allowance" is not an answer — the lease language and who paid the contractors is the answer.

Worked example: $1.2M restaurant building

This is an illustrative example, not a study result. Actual reclassification depends on the specific site, the land allocation, and what's structural vs. decorative. Numbers below assume the property was acquired and placed in service after January 19, 2025, so the permanent 100% bonus applies.

Assumptions:

• Purchase price: $1,200,000
• Land allocation (20%): $240,000 — land never depreciates
• Depreciable basis: $960,000
• Illustrative reclassification split: 55% 5-year / 15% 15-year / 30% 39-year

The math:

At a 35% marginal federal rate, that's roughly $238,000 in first-year federal tax savings — versus about $7,400 in Year-1 depreciation if the whole building just rode the 39-year schedule.

A few honest caveats before anyone multiplies their own purchase price by these ratios:

The 55/15/30 split is illustrative. National Tax Group's 50–100% band for restaurants is the most aggressive published estimate; other datasets show 16–40%. Your site's real split comes from an engineering analysis, not a table.

The land allocation drives everything. A restaurant on an expensive lot has a smaller depreciable basis — and a smaller study result.

Bonus depreciation is a federal provision. States like California decouple from federal bonus — confirm state treatment with your CPA.

Look-back studies: restaurants bought before 2026

If you bought or built out a restaurant years ago and never did a study, the benefit isn't lost. A look-back study reclassifies the components as of the original placed-in-service date, and the missed depreciation is claimed as a one-time catch-up adjustment on Form 3115 under Section 481(a) — no amended returns needed [7]. This works for both the original building purchase and tenant build-outs you funded.

One thing to know: the bonus rate on a look-back study follows the year the property was placed in service, not the year you file the 3115. Property placed in service in 2023 gets the 80% TCJA rate on its bonus-eligible components; property placed in service in 2024 gets 60%. OBBBA is not retroactive. Read our look-back study guide for the full mechanics.

What it costs and what's included

A room42 restaurant study is $525 flat — the full engineering analysis, component classification per the IRS Audit Techniques Guide, and tax review. No hourly billing, no surprise add-ons, no 4–8 week wait. We've completed over 2,800 studies unlocking $127M+ in tax savings, with a 4.9/5 rating across 500+ reviews. Start with a free estimate — five minutes, no credit card.

FAQ

How does cost segregation work for a restaurant?

A cost segregation study reclassifies restaurant components — kitchen equipment, hoods, POS systems, millwork, signage, and site work — into 5-year and 15-year property instead of the 39-year building class. National Tax Group estimates restaurant reclassification at 50–100% of cost, though results depend on the specific location. With 100% bonus restored, reclassified components are generally deductible in Year 1.

Can a restaurant owner take 100% bonus depreciation in 2026?

Yes. The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, with implementation guidance in IRS Notice 2026-11. That covers the 5-year kitchen equipment and 15-year site improvements a restaurant study typically identifies. Property under a binding contract before January 20, 2025 stays on the old phase-down rates.

What restaurant items do NOT qualify for cost segregation?

Structural shell components — foundation, framing, roof, load-bearing walls, structural floors — stay at 39 years. The IRS scrutinizes decorative classifications most closely, so studies need engineering documentation for themed finishes. Land never depreciates. Leasehold improvements are a gray zone: tenant-funded improvements you own may qualify as 15-year qualified improvement property, while landlord-funded work belongs to the landlord's building.

I lease my restaurant space. Can I still do a cost segregation study?

If you funded the build-out, often yes. Tenant-funded interior improvements you own may qualify for 15-year treatment as qualified improvement property, provided they were placed in service after the building was first placed in service. If the landlord funded them, they're part of the building. A study documents which improvements you actually own before you claim anything — check your lease and who paid the contractors.

Can I study a restaurant I bought in 2024?

Yes, through a look-back study. The missed depreciation is claimed as a one-time catch-up adjustment on Form 3115 under Section 481(a) — no amended returns needed. This works for both the original building purchase and tenant build-outs. Note the bonus rate follows the placed-in-service year (60% for 2024 placements), since OBBBA is not retroactive.

Sources

• [1] National Tax Group, "Maximize Your Property Tax Savings with Professional Cost Segregation Services in 2025" (Oct 2025): restaurants & car washes 50–100% reclassification band — https://medium.com/@nationaltaxgroup179d/maximize-your-property-tax-savings-with-professional-cost-segregation-services-in-2025-51893ba59f9a
• [2] Reclassification datasets: Seneca Cost Segregation (restaurants 23–40%) and Cost Seg Smart study data (restaurants 16–29%), summarized in our reclassification percentages reference
• [3] OBBBA 100% bonus restoration, Jan 19, 2025 cutoff, IRS Notice 2026-11: BDO, Wipfli, Johnson Block
• [4] IRS Cost Segregation Audit Techniques Guide, restaurant industry directive (asset class 57.0): decorative millwork classification (1245, 5-year) — reproduced at https://jmsolutions.org/wp-content/uploads/2017/10/irs-table.pdf
• [5] 15-year property bonus eligibility (recovery period ≤ 20 years): Veritax Advisors on IRS Notice 2026-11
• [6] QIP 15-year recovery, CARES Act fix, OBBBA 100% bonus, leased-space rules: TaxGPT, Doeren Mayhew, LoopNet
• [7] Look-back catch-up via Form 3115 / §481(a): K-38 Consulting