The Issue:
Under current law, the depreciation life for non-residential buildings and improvements to these buildings, which includes restaurants, is 39 years. A July 2000 Treasury Department study on "Depreciation Recovery Periods and Methods," as well as a May 1999 Congressional Research Service study on "Depreciation and the Taxation of Real Estate," acknowledged that the depreciation life for real estate is slow relative to economic depreciation. The studies acknowledge that a 39-year life is too long for a building. Perhaps more onerous, however, is the fact that improvements made to a building are depreciated at the same rate as the buildings themselves, despite the fact that most restaurants make improvements to their buildings far more frequently than every 39 years. The current 39-year period represents the longest depreciation period for this type of property since 1970 and can significantly overstate the useful life of the structure and, even more so, the improvements made thereto.

Restaurant Concerns:
Successful restaurants periodically require a fresh look; most do not allow the same improvements to be used for 39 years. Instead, restaurant owners generally remodel their stores as often as every five to seven years to reflect changes in customer taste and needs. Moreover, improvements simply do not last as long as 39 years and must be replaced far more frequently. In fact, most restaurants do not even wait 39 years to totally replace the building structure of their stores.

The consequences of the excessive recovery period and understated depreciation rate for commercial structures, renovations, and improvements are a depreciation deduction that understates the actual effects of exhaustion and wear and tear on the structure and results in an effective tax rate on the income from the use of these assets that is higher than the statutory tax rate.

Various legislative proposals have attempted to address some of the problems associated with the current treatment of building improvements — those that are related to "leasehold" improvements. While NCCR believes these initiatives are a good first step in addressing serious cost recovery issues for real estate, these proposals do not address the concerns of restaurants that have chosen to own rather than to lease their retail space.

NCCR Says:
Congress should pass legislation to create a new, economically appropriate 10-year class life for all commercial improvement property, including restaurant property, whether leased or owned.

Status:
Several depreciation bills of interest to the chain restaurant industry have been introduced thus far in the 107th Congress.

Rep. Mark Foley (R-FL) introduced legislation (HR 826) that would benefit restaurants specifically. Sen. Fred Thompson (R-TN) introduced identical legislation (S 732) in the Senate. These bills would lower the depreciable life of stand-alone, owned restaurant buildings and improvements thereto from 39 years to 15 years.

Reps. Clay Shaw (R-FL) and Charles Rangel (D-NY) introduced H.R. 1030, which would lower the recovery period to 10 years for leasehold improvements — "refresh and regreen" improvements to "qualified leasehold improvement property." H.R. 1030 would apply to all retail establishments, not just to restaurants, and therefore the cost to the federal government would be greater.

Reps. Jim Ramstad (R-MN) and Ron Lewis (R-KY) introduced H.R. 1507, the "Small Business Franchise Property Recovery Act." H.R. 1507 would classify certain franchise property as 15-year depreciable property.

While NCCR recognizes that the 15 year recovery period provided for in these bills is longer than the 10 year period we would prefer, we believe this legislation is a positive step in the direction of long-term comprehensive depreciation reform.