Restaurant buildouts: QIP, cost segregation, and 100% bonus depreciation

Opening or remodeling a restaurant is capital intensive, but the tax code lets you recover much of the cost quickly if it is categorized correctly.

Three buckets in a typical buildout

QIP covers improvements you make to the interior of a nonresidential building after it was first placed in service, excluding enlargements, elevators and escalators, and the internal structural framework. Improvements that come with a building you buy aren't QIP to you. Because QIP is 15-year property, it is eligible for 100% bonus depreciation.

Bonus depreciation is permanent at 100%

For property acquired after January 19, 2025, equipment, furniture, and QIP can be deducted in full in year one. Leasehold buildouts in a rented space usually qualify as QIP.

Key numbers: QIP 15 years · 100% bonus depreciation · Section 179 $2.56M for 2026 · nonresidential building 39 years.

Cost segregation for owned buildings

Restaurants that own their buildings benefit from cost segregation more than most businesses, because commercial kitchens have dedicated plumbing, electrical, and gas lines, grease traps, specialty finishes, and site improvements. The building itself is still 39-year property, and the old 15-year "qualified restaurant property" category doesn't apply to property placed in service after 2017.

A worked example

An operator leases a 4,000-square-foot space and spends $1.1M on the buildout: $420,000 of kitchen equipment and furniture, $610,000 of interior improvements, and $70,000 for a roof extension over the patio, which is structural, 39-year property. With 100% bonus depreciation on the first two categories, about $1.03M is deductible in the opening year. If the restaurant has a loss, limits apply before it becomes a net operating loss. Pass-through owners and sole proprietors can face basis, at-risk, and passive loss rules, and in 2026 business losses above $256,000, or $512,000 for joint filers, are carried forward under the excess business loss rule. NOL carryforwards can offset only 80% of taxable income.

In Connecticut

Connecticut doesn't follow bonus depreciation. Owners of pass-through restaurants add back 100% of federal bonus depreciation in the year it's taken and subtract 25% of it in each of the next four years. In this example, about $1.03M is added back in the opening year and about $257,500 is subtracted in each of years two through five. Connecticut also adds back 80% of a §179 deduction and allows 25% of that add-back in each of the next four years. C corporations figure Connecticut depreciation as if bonus depreciation didn't exist. The equipment and furniture are also reported on the personal property declaration filed with the town assessor each November 1. See the Connecticut restaurant guide.

Tenant improvement allowances

When a landlord pays for improvements through a TI allowance, ownership of the improvements determines who depreciates them. For short leases of retail space, §110 may let the tenant exclude the allowance from income if it is used for qualified improvements, in which case the landlord depreciates them.

Common mistakes

1. Lumping the entire buildout into 39-year property.
2. Treating structural additions as QIP.
3. Not writing off the remaining basis of improvements demolished in a remodel through a partial disposition election.
4. Ignoring state bonus depreciation decoupling.

How Summer Associates helps

Summer Associates' restaurant team reviews contractor invoices to categorize buildout costs, coordinates cost segregation on owned property, and makes the elections that can increase first-year deductions.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.