Can restaurant operators claim bonus depreciation on kitchen renovations and equipment?
For an owner, selling a restaurant requires more than negotiating the headline price. The structure, timing, asset allocation, historical compliance, and owner’s personal planning can materially change the cash ultimately retained.
A restaurant exit strategy should therefore begin before the business is marketed, ideally while the owner still has time to correct weaknesses and evaluate alternatives.
Begin tax and financial preparation at least six to twelve months before going to market. Buyers commonly review three years of financial history, so clean, consistent records are more persuasive than a long list of last-minute adjustments. Early planning also creates time to resolve sales tax, payroll tax, tip reporting, lease accounting, and franchise-fee issues that could otherwise reduce the purchase price or increase escrow holdbacks.
The stock sale vs asset sale tax implications can be substantial. In a stock sale, the buyer acquires the ownership interests of the business and generally succeeds the entity’s assets and liabilities. In an asset sale, the buyer purchases selected assets and generally receives a cost basis in those acquired assets based on the purchase price allocated among them. Sellers should model both structures, including entity-level and shareholder-level tax where applicable, rather than assuming the highest offer produces the best after-tax result.
When selling a restaurant through an asset sale, the buyer and seller must agree on how the purchase price is allocated among assets such as kitchen equipment, furniture, inventory, leasehold improvements (if transferred), and intangible assets like goodwill or the restaurant’s trade name. The allocation affects taxes for both parties because gain or loss is determined separately for each asset, and the buyer’s tax basis and future depreciation or amortization depend on the agreed allocation. Since both the buyer and seller generally report the allocation to the IRS on Form 8594, reviewing it before closing can help restaurant owners better understand the after-tax value of the transaction and avoid unexpected tax consequences. Depreciation Recapture can cause part of the gain on previously depreciated equipment or improvements to be taxed differently from gain attributable to goodwill. The allocation is negotiated, not merely entered after closing.
Owners should calculate the capital gains tax on selling a business together with ordinary income exposure, state taxes, transaction costs, debt repayment, working-capital adjustments, and any taxes imposed at the entity level. A simple sources-and-uses schedule can show what remains after each obligation. This prevents an attractive purchase price from creating unrealistic expectations about spendable proceeds.
Net operating losses, credits, suspended losses, and other tax attributes may affect the economics of a transaction, but their availability can be limited. Ownership changes may restrict future use of certain carryforwards. The seller should also conduct tax due diligence covering income, sales and use, payroll, property, and local taxes. Unresolved liabilities frequently become negotiation points, indemnities, purchase-price reductions, or extended escrows.
Business Exit Planning should include pre-transaction income and transfer tax strategies to help maximize value for the business owner. Common approaches include the use of trusts, transferring ownership interests to family members or family partnerships, and charitable giving strategies. Effective planning should also coordinate these strategies with the owner’s estate and succession goals rather than focusing only on the business sale. Depending on the circumstances, installment sales, family transfers, and charitable planning may provide tax and wealth transfer benefits, but they typically require advance planning and a well-supported business valuation. These and many other strategies can take months or even years to implement, and some become unavailable or significantly less effective once a sale is substantially certain.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Cory Bennett, partner in charge of Bennett Thrasher’s Hospitality practice, or call us at 770.396.2200.
Back to Q&A
Never miss an update. Sign up to receive our monthly newsletter to unlock our experts' insights.
Subscribe Now