Illustrative Restaurant Property
A hypothetical restaurant build-out highlighting dedicated kitchen utilities versus central HVAC, using the IRS restaurant matrix. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume a tenant owns the interior, cook line, and hood; the landlord owns the strip-center shell.
- Assume this is a restaurant, so the Publication 5653 restaurant matrix is the closest examiner table. It is not a statute.
- Assume no written §1060 allocation of a purchased going concern. If the tenant later bought an existing restaurant with a written allocation, Peco Foods would be a risk to read.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- The box is 39-year property unless another statute applies. Basis follows title and the lease.
- Dedicated kitchen hook-ups follow the equipment in the restaurant matrix; general HVAC that serves dining stays with the building improvement.
- Do not allocate a rooftop unit between dining and kitchen if it serves both. The matrix says allocation of HVAC is not appropriate.
- Smallwares, if elected under Rev. Proc. 2002-12, are supplies, not depreciable building.
A tenant builds out a restaurant in a strip center. The landlord owns the shell. The tenant owns the interior, kitchen line, and hood. Suppose, for arithmetic only, the tenant capitalizes $1,200,000 of build-out and equipment. That invented total is the depreciable pool for the tenant’s study. It does not include the landlord’s shell, and it does not imply a short-life percentage.
Using the restaurant matrix as a teaching map, the cook line, dedicated gas/water/drain, hood, and makeup air solely for the hood are treated as 5-year property. The restroom core and the rooftop unit that cools the dining room stay with the tenant’s building improvement, generally 39-year or QIP if the QIP tests are met. Smallwares, if elected under Rev. Proc. 2002-12, are supplies, not depreciable building.
Order of operations for a tenant: confirm who owns what; identify capitalized basis from pay applications; classify the interior under §168 (including whether QIP applies); separate process equipment and dedicated utilities; inspect; reconcile; CPA files Form 4562. Repair-versus-capital questions on later work run through Treas. Reg. §1.263(a)-3 first.
Who owns what
A study for the tenant does not depreciate the landlord’s shell. Basis follows title and the lease. Landlord-funded work is the landlord’s property. Tenant-funded work is the tenant’s. A cost segregation report that mixes the two will not reconcile to either party’s books.
If this were instead a purchase of a going restaurant, the closing file would be read for a written §1060 allocation. Peco Foods can bind a buyer to that writing. This illustration is a tenant build-out, so that risk is noted only as a fork in the road, not as a fact of this example.
Restaurant matrix as a map
Publication 5653 chapter 7.C reproduces a restaurant field directive. That matrix treats food storage and preparation equipment as 5-year property, along with dedicated water, gas, and drain lines, equipment exhaust hoods, air makeup solely for kitchen equipment, and dedicated outlets. Central HVAC is 39-year property. Separate kitchen HVAC units that meet the sole-justification test are 5-year. The matrix says allocation of HVAC is not appropriate.
Carpeting is treated as not permanent in that matrix. Restroom accessories, partitions, and fireplaces are building. Decorative millwork can be 5-year in the same table. Those are examiner rows for restaurant facts. They are not a rule that every sink or every light in every dining room is personal property. Treas. Reg. §1.48-1 still defines structural components.
Dedicated utilities versus functional allocation
Dedicated kitchen hook-ups in the restaurant matrix are classified with the equipment because of how they function in that industry table. That is not the same thing as Scott Paper functional allocation of primary and secondary electrical distribution. The audit guide states that the IRS accepts functional allocation for primary and secondary electrical distribution; it does not extend that method to plumbing or HVAC as an IRS-accepted approach.
If electrical must be split on this job, document design load: house lighting and dining outlets versus the kitchen equipment panel. Drawings and a panel directory support the split. Unbundling a single “Division 26” pay-application line is an estimate and should be described as one. See the bundled-contractor-costs illustration.
QIP, smallwares, and later work
Interior improvements a tenant places in service in a nonresidential building may be qualified improvement property under §168(e)(6) if they are interior, made after the building was first placed in service, and not an enlargement, elevator or escalator, or internal structural framework. The cook line is equipment, not QIP. The restroom core might be QIP for the tenant if the tests are met; that is a CPA determination. QIP is 15-year property and is generally bonus-eligible; it uses straight line.
Rev. Proc. 2002-12 lets restaurants and taverns treat smallwares — dishes, pots, small appliances — as materials and supplies. It does not give the restaurant structure a 15-year life. Rev. Proc. 97-10 is a gas-station election, not a restaurant rule.
Inspection, reconciliation, and filing
Inspect the hood length, whether makeup air serves only the hood, whether the rooftop unit serves dining, kitchen, or both, and whether floor covering is strippable. A hood on a drawing that was never installed is not an asset. CostSeg SI describes drawing extraction as proposed; a person confirms what was built.
Reconcile the invented $1,200,000 — or the actual capitalized total — across equipment invoices, contractor lines, and remaining interior. The CPA applies §168(k) as of Notice 2026-11 to qualified personal property and any QIP, and prepares Form 4562. This page does not compute tax. Educational information, not tax advice.
Sources
- 1IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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