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National Restaurant Association - Lawmakers back bills for 15-year depreciation of restaurant construction, improvements

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Lawmakers back bills for 15-year depreciation of restaurant construction, improvements

Restaurateurs are leading the charge on Capitol Hill to promote fairness in how federal tax law treats the billions of dollars restaurateurs spend each year to build and improve their operations.

The National Restaurant Association heads a multi-industry Depreciation Fairness Coalition that is pressing Congress to enact a permanent 15-year schedule for depreciating the cost of new restaurant construction and improvements.

Congress has approved a 15-year schedule multiple times since 2004 but has never made the schedule permanent. The clock is running out on the current 15-year schedule, which is set to expire at the end of 2011. If Congress doesn’t act, starting Jan. 1, 2012, restaurateurs will be forced to depreciate their spending on new construction and restaurant improvements over 39.5 years.

“Congress has a history of extending the shortened depreciation schedule in fits and starts,” says Dave Koenig, the NRA’s vice president for tax and profitability. “This complexity and uncertainty affects how restaurateurs respond to the tax incentive.”

The difference between the long and short schedules has a significant bottom-line impact. “The tax treatment of building depreciation makes an important difference in cash flow and profitability for restaurant operators,” Koenig says.

For example, a restaurant operator who invests $1 million in a new building or building improvements sees tax liability increase by nearly $10,000 if the recovery period increases from 15 years to 39 years. “In an industry with median profit margins of 3 to 5 percent, every penny counts,” Koenig says.

The Depreciation Fairness Coalition has asked Congress to apply the permanent 15-year depreciation schedule to spending on retail and leasehold improvements as well as restaurant construction and improvements.

Key members of Congress’s two tax-writing committees introduced bills this spring to make the 15-year schedule permanent. H.R. 1265, by House Ways and Means Committee members Jim Gerlach (R-Pa.) and Richard Neal (D-Mass.), is pending in the House, and companion bill S. 687 has been introduced in the Senate by Finance Committee members Kent Conrad (D-N.D.) and John Cornyn (R-Texas).

The NRA and its members are working to recruit cosponsors for H.R. 1265 and H.R. 687. More than 30 House members and 11 Senators have become cosponsors so far.

Koenig notes that more than 130 million Americans patronize restaurant establishments a day, which amounts to a daily human assault on restaurant building structures. “These businesses must constantly make changes to keep up with the structural and cosmetic wear and tear caused by customers and employees. The heavy use accelerates deterioration of a building’s entrance, lobbies, flooring, restrooms, and interior walls.”

NRA research shows that most restaurants remodel and update their buildings every six to eight years. This makes the 15-year schedule a much more accurate time frame than 39 years for writing off the cost of improvements, says Koenig.

“The 15-year depreciation schedule for leasehold improvements, restaurant improvements, new restaurant construction, and retail improvements reflects the tax policy principle that costs of assets are allocated over the period in which they are used,” says Koenig. “Assets with longer expected lives are depreciated over a longer period of time, while assets with shorter lives are depreciated over a shorter period of time.”

National Restaurant Association surveys show that restaurants are ready to invest. This summer 50 percent of restaurant operators told the Association that they plan to make a capital expenditure for equipment, expansion or remodeling in the next six months – one of the highest levels in the past few years. But operators need to know what the tax treatment will be in the future in order to make decisions today, Koenig points out.

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