Case Study: Maximizing Depreciation Expense For Companies With Significant Capital Improvements And Other Fixed Asset Expenditures

Through the strategic use of Section 179 and Bonus Depreciation, companies can generate significant depreciation expense write-offs for amounts that can equal the total cost of the expenditure.  As opposed to capitalizing the total cost of the asset and writing the cost off over 3 to 39 years.

For companies with significant fixed asset purchases, we recommend creating a formal fixed asset capitalization policy.  This will serve to provide both support and guidance on how fixed assets are depreciated and the basis for the advanced depreciation methods used by the Company for expensing select fixed asset expenditures.  This document can become quite useful if there is an IRS audit, to further support the basis for a Company’s depreciation expense reflected on their tax returns.

Below is an example of a policy document for a fictitious company that is a restaurant that discusses the capitalization policies for each of the company’s fixed assets, including its capital improvements.  It includes the various classifications, related useful lives for depreciation and depreciation methods for fixed assets.  It also discusses the use of Section 179 expensing and Bonus Depreciation to maximize depreciation write-offs.

Fixed Asset Capitalization Policy

Company Name: ABC Hospitality LLC
Effective Date: January 1, 2026

Capitalization Threshold

ABC Hospitality LLC will capitalize individual assets that meet the following criteria:

• Minimum Cost: $2,500 per item or per invoice (includes tax, shipping, and installation).
• Useful Life: Must have an expected life of more than one year.

De Minimis Safe Harbor: Items costing less than $2,500 will be expensed in the year of purchase.  $2,500 threshold aligns with the IRS De Minimis Safe Harbor for taxpayers without an applicable financial statement   The threshold applies per invoice or per item as substantiated by vendor detail, consistently applied.

Asset Classes and Depreciation Schedules

Below are the standard recovery periods for our specific industry asset classes under MACRS (Modified Accelerated Cost Recovery System) for 2026 depreciation for the 2026 tax year.

Depreciation Definitions & Eligibility
100% Bonus Depreciation (Section 168(k))

Under the 2026 rules established by the OBBBA, you can deduct 100% of the cost of qualified property in the first year.

• Eligible: New and certain used assets with a recovery life of 20 years or less.
• Key Asset: Qualified Improvement Property (QIP)—such as interior restaurant build-outs—now permanently qualifies for this 100% immediate write-off.

Bonus depreciation treatment is subject to federal tax law in effect for the applicable tax year. If bonus depreciation percentages are reduced or repealed in future legislation, the Company will follow the law as enacted.

Section 179 Expensing

For 2026, the Section 179 deduction limit has increased to $2,560,000

• Phase-out: The deduction begins to reduce dollar-for-dollar once total equipment purchases exceed $4,090,000.
• Application: Section 179 is applied first, followed by Bonus Depreciation on any remaining basis.

• Total Asset Purchases: $4,500,000 (Kitchen equipment, POS systems, furniture, etc.)
• Maximum Deduction: $2,560,000
• Phase-out Threshold: $4,090,000

1. Calculate the Excess Spending:

2. Apply the Phase-Out:

3. How to Address the Remaining Balance:

Bonus Depreciation: Because of the OBBBA of 2025, you can apply 100% Bonus Depreciation to the remaining $2,350,000.

Key Takeaway for ABC Hospitality

• Total Write-off: Even though your Section 179 was “phased out,” you still get to write off the full $4,500,000 in Year 1 because Bonus Depreciation (at 100%) covers whatever Section 179 misses.
• The “Cliff”: If ABC Hospitality spent over $6,650,000 ($4,090,000 threshold + $2,560,000 max deduction), your Section 179 deduction would be reduced to zero

Discussion of Capital Improvements That Qualify for Section 179 and Bonus Depreciation

Capital improvements are generally split into two categories: Qualified Improvement Property (QIP) and Specific Building Systems.

Qualified Improvement Property (QIP)

QIP includes almost any interior improvement made to your restaurant after the building was first placed in service.

Eligible for BOTH Section 179 & Bonus Depreciation:

• Dining Room Remodels: New flooring (tile, wood), drywall, interior doors, and ceiling tiles.
• Kitchen Upgrades: Installing new interior plumbing or electrical wiring specifically for kitchen equipment.
• Atmosphere & Lighting: Permanent lighting fixtures, custom woodwork/paneling, and bar build-outs.
• Restroom Renovations: New toilets, sinks, and partitions.

What is EXCLUDED from QIP?

• Building expansions (adding a new wing or outdoor patio structure).
• Elevators or escalators.
• Changes to the internal structural framework (load-bearing walls).

External Improvements

External improvements (land improvements) are treated differently because they generally do not qualify as Qualified Improvement Property (QIP), which is strictly for interiors. For a restaurant, this includes things like parking lots, outdoor seating, and signage.  Under the OBBBA of 2025 and current tax code, here is how those external costs are handled:

Land Improvements (15-Year Property)

Most external restaurant improvements fall into the 15-year MACRS category. This is excellent for taxes because 15-year property is eligible for 100% Bonus Depreciation.

Eligible for 100% Bonus Depreciation:

• Parking Lots: Asphalt paving, striping, and concrete curbs.
• Outdoor Dining: Permanent concrete patios, built-in outdoor bars, and permanent pergolas.
• Fencing: Security fencing or decorative perimeter fences for outdoor seating.
• Landscaping: Permanent trees, shrubs, and sod installed during a major renovation.
• Signage: Permanent monument signs or lighted exterior pylon signs.

Building Shell & Structural (39-Year Property)

Improvements to the “envelope” of the building are generally considered 39-year structural property. These are NOT eligible for Bonus Depreciation, but specific items are “carved out” for Section 179.

Eligible for Section 179 ONLY

• Roofing: Entirely new roof systems or structural repairs to the roof.
• HVAC: New rooftop air conditioning units or external heating systems.
• Exterior Fire/Security: External fire escapes or outdoor security camera systems.

Ineligible for both (Must depreciate over 39 years)

• New exterior walls or structural expansions.
• New windows or exterior doors (unless part of a specific energy-efficiency program).

Comparison Table for External Costs

Taxable Income Limitation
Section 179: The Taxable Income “Cap”
Section 179 is strictly limited by the amount of profit your business earns.

• The Rule: You cannot use a Section 179 deduction to create a net loss for your business.
• The Limitation: Your deduction is capped at your aggregate taxable income from the active conduct of any trade or business during the year.
• The “Carryover” Benefit: If your Section 179 deduction exceeds your profit (e.g., you have $100k in equipment but only $40k in profit), you don’t lose the deduction. You can carry it forward indefinitely to future tax years until you have enough profit to use it.

Bonus Depreciation: The “Net Operating Loss” Creator
Bonus Depreciation is much more flexible and is not restricted by your income.

• The Rule: There is no taxable income limit for Bonus Depreciation.
• Creating a Loss: You can use Bonus Depreciation even if your business is already in the red. It can be used to create or increase a Net Operating Loss (NOL).
• Immediate Impact: Because of the OBBBA of 2025, which restored 100% bonus depreciation, a restaurant opening a new location in 2026 can write off millions in interior build-outs immediately, even if that location hasn’t made a single dollar in profit yet.
• NOL Rules: The resulting loss can be used to offset 80% of taxable income in future years (under current tax law).

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.