Quoted from http://nationalassetpartners.com/index.php/emergbency-economic-stabilization-act:
Summary:
The 15-year recovery period for improvements to a restaurant building is extended to apply to improvements placed in service in 2008 and 2009. A 15-year recovery period now applies to restaurant buildings placed in service in 2009.Background:
The American Jobs Creation Act of 2004 (P.L. 108-357) created a new category of 15-year property under the Modified Adjusted Cost Recovery System (MACRS) called "qualified restaurant property." This category applies to property placed in service after October 22, 2004 and before January 1, 2008 (Code Sec. 168(e)(3)(E)(v)). The straight-line method applies to such property (Code Sec. 168(b)(3)(H)). If the MACRS alternative depreciation system (ADS) is elected or otherwise applies, the recovery period is 39 years and the straight-line method applies (Code Sec. 168(g)(3)(B)). Whether or not ADS is elected, the applicable convention is the half-year convention, unless the mid-quarter convention applies.Qualified restaurant property is any section 1250 property which is an improvement to a building if the improvement is placed in service more than three years after the date the building was first placed in service and more than 50 percent of the building's square footage is devoted to preparation of and seating for on-premises consumption of prepared meals (Code Sec. 168(e)(7)). The three-year period is measured from the date that the building was originally placed in service, whether or not it was originally placed in service by the taxpayer. For example, improvements to a restaurant building that is at least three years old at the time the taxpayer buys the building may qualify.
Prior to enactment of this provision, a section 1250 improvement to a restaurant building would be depreciated over 39 years beginning in the month that it was placed in service using the mid-month convention. An improvement to a restaurant that is section 1245 property (personal property) may be depreciated as MACRS five-year property (Asset Class 57.0) under the MACRS cost segregation rules.
The provision only applies to improvements to a restaurant building. Improvements that are not part of or attached to the restaurant building, for example, a detached sign supported on a concrete foundation, sidewalk, or depreciable landscaping, would generally constitute separately depreciable land improvements which also have a 15-year recovery period but may be depreciated using the 150-percent declining balance method. Other unattached improvements may qualify for a shorter recovery period if not considered a land improvement
NEW LAW EXPLAINED:
15-year recovery period for restaurant improvements extended provided for restaurant buildings.—The 15-year MACRS recovery period for qualified restaurant property that is an improvement to a restaurant is extended to apply to property placed in service before January 1, 2010 (Code Sec. 168(e)(3)(E)(v), as amended by Emergency Economic Stabilization Act of 2008 (P.L. 110-343)).Planning Note:
The 15-year recovery period is not elective. However, a taxpayer could effectively elect out by making an ADS election and depreciating the property using the straight-line method. An ADS election, however, would apply to all MACRS 15-year property placed in service by the taxpayer during the tax year, not just qualified leasehold improvement property.Comment
Fiscal-year taxpayers that filed a return using a 39-year recovery period for qualified restaurant property placed in service during 2008 should file an amended return to correct the depreciation period. Note, however, the IRS also allows a taxpayer that has filed only one incorrect return to file Form 3115 and claim a section 481 adjustment. See Section 4 of Rev. Proc. 2007-16, I.R.B. 2004-3.Practical Analysis:
Vincent O'Brien, President of Vincent J. O'Brien, CPA, PC, Lynbrook, New York, notes that restaurant improvements are ineligible for bonus depreciation under the Economic Stimulus Act of 2008 (P.L. 110-185). However, such improvements are eligible for the shorter 15-year recovery period.The new law also expands the definition of qualified restaurant property to include a building placed in service after December 31, 2008, and before January 1, 2010, if more than 50 percent of the building's square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals (Code Sec. 168(e)(7)(A), as amended by the Emergency Economic Act of 2008). Such a building is depreciated similarly to an improvement to a restaurant building. Thus, the building is depreciated over 15 years (39 years under the MACRS alternative depreciation system (ADS)) using the straight-line method and the half-year or mid-quarter convention.
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