Short answer
Retail stores and restaurants are the property types the IRS has addressed most directly. Its Cost Segregation Audit Techniques Guide reproduces industry matrices for both, listing common components and the classification and recovery period examiners are told to accept when a taxpayer's return is consistent with them. The matrices are examiner guidance, not law, but they make these studies more predictable than most. The building is nonresidential real property with a 39-year life. Trade-name signs, decorative millwork in selling areas, strippable floor coverings, refrigeration equipment, kitchen equipment and its dedicated hook-ups, and point-of-sale systems are commonly short-life property. Ceilings, general lighting and electrical, central HVAC, fire protection and building security stay with the building. Parking, lighting and landscaping are generally 15-year land improvements, and interior build-outs after a building is first placed in service may be 15-year qualified improvement property. This article covers what a retail cost segregation or restaurant cost segregation study examines, the evidence, the pitfalls and the adviser's role. It is general education, not tax advice.
What a study examines in a store or restaurant
| Component group | Typical treatment to examine | Examples |
|---|---|---|
| Land | Not depreciable | The site |
| Building shell and systems | 39-year nonresidential real property | Structure, roof, storefront, ceilings, doors, general electrical and lighting, central HVAC, plumbing, fire protection, building security |
| Selling-area fit-out | Often 5-year, asset class 57.0 | Trade-name signs, decorative millwork and cashwraps, strippable flooring and carpet, display fixtures, shelving |
| Kitchen and refrigeration | Often 5-year, asset class 57.0 | Cooking and refrigeration equipment, dedicated water, gas and drain lines, equipment exhaust hoods, walk-in refrigeration equipment |
| Technology and furniture | 5- or 7-year on asset class | Point-of-sale systems, computers, office furniture, dining furniture |
| Site improvements | Generally 15-year land improvements | Parking, drives, curbs, sidewalks, site lighting, sign foundations, landscaping, drive-through lanes |
| Later interior improvements | May be 15-year qualified improvement property | Remodels and tenant build-outs |
The rows show where questions usually land, not answers for your building. A study should state its reasoning, and where it departs from the IRS matrix, explain why.
Retail: what the matrix shows
The retail matrix covers department, grocery and similar stores. A few of its lines show how the analysis works:
- Signs. Interior and exterior signs that display a trade name or identify departments are section 1245 property; for pylon signs, only the sign face. Exit signs and restroom identifiers stay with the building.
- Millwork. Decorative finish carpentry in a selling area, such as cashwraps, counters and decorative cabinets, is short-life property; general millwork that is part of the building is not.
- Floor coverings. Coverings installed with strippable adhesives, such as vinyl composition tile and carpet, are treated as short-life; tile, stone and wood set permanently are building components.
- Refrigeration. Refrigeration equipment is section 1245 property; the walls, floor, ceiling and insulation of a built-in cooler or freezer room are building components, while a portable prefabricated unit may not be.
- Security. Electronic article surveillance aimed at merchandise theft is short-life; locks, alarms and cameras protecting the building are building components.
- Loading docks. Levelers, bumpers, seals and dock doors are building components; compactors, conveyors and balers are equipment.
The regulations support the same distinction: tangible personal property includes items attached to a building that are not structural components, such as refrigerators, grocery counters, display racks and shelves, and neon and other signs.
Restaurants: kitchens and hook-ups
The restaurant matrix covers the kitchen in more detail. Kitchen equipment hook-ups, including separate water lines from the main to equipment, gas lines from the building's main line to fryers or ovens, special drain lines, equipment exhaust hoods, ventilation needed solely for kitchen equipment, and dedicated electrical to a localized power source for specialized equipment, are treated as section 1245 property. General outlets, hand-sink plumbing, general lighting and building HVAC are not. Carpeting in a restaurant is treated as not permanently attached. Drive-through order and payment equipment is short-life; the drive-through window and bay are part of the building.
A restaurant inside a store or hotel is examined using the restaurant matrix, not the retail one.
Leased space, build-outs and convenience stores
Most retail and restaurant space is leased, and the study must follow the money:
- Who paid. A landlord depreciates the shell, site and improvements it funded; a tenant depreciates the build-out and equipment it paid for. For a lessor, the asset class of leased property is determined as if the tenant owned it.
- Qualified improvement property. Interior improvements made by the taxpayer to a nonresidential building after the building was first placed in service are 15-year property, unless they are enlargements, elevators or escalators, or internal structural framework. The older categories of qualified restaurant and qualified retail improvement property no longer apply to property placed in service after 2017.
- Section 179. Qualified improvement property and certain later improvements to nonresidential real property, such as roofs, HVAC, fire protection and alarm systems and security systems, may be eligible for the section 179 election, subject to its limits.
- Lease end. Improvements a landlord made for a tenant and abandons at lease end are treated as disposed of then, and the partial disposition election can apply to retired portions of a building.
- Fuel. A building that qualifies as a retail motor fuels outlet is 15-year property, whether or not food or convenience items are sold there; the qualification test is applied on the facts.
Chains and multiple locations
Owners of several similar stores or restaurants face a cost question: a full study of every location may cost more than it is worth. The IRS guide describes sampling or modeling approaches for multiple similar properties, such as retail or food chains, under conditions. The approach studies a documented sample, often built around prototype designs, and applies the results to the population with the method disclosed. It is a statistical method applied to a defined group, not a percentage borrowed from another owner's buildings, and it needs a practitioner who can explain how the sample was drawn and how the results were extended.
Single-tenant net-lease buildings, such as a fast-food restaurant or pharmacy owned by an investor, raise a narrower set of questions. The investor usually owns the building and site; the tenant often owns its equipment and some of its fit-out. The study should cover only what the investor owns, classified by reference to the tenant's activity.
- Construction or build-out records: schedules of values, pay applications, change orders and subcontractor invoices by trade, especially electrical, plumbing, mechanical and millwork.
- Drawings: architectural, electrical, plumbing and kitchen equipment plans, which show what each circuit and line serves.
- Equipment and fixture schedules, and invoices for signs, millwork and refrigeration.
- Leases and work letters, for ownership of each improvement and its fate at lease end.
- Closing statement and land support for an acquired building.
- A site visit, which for a chain can be organized around prototype stores under a documented sampling approach the IRS guide describes.
Common pitfalls
- Treating the matrix as a menu. It applies to the general fact patterns of each industry; a study still has to match each item to its facts.
- Classifying all kitchen electrical and plumbing as equipment, including general outlets and hand sinks.
- Mixing landlord and tenant costs.
- Missing build-out dispositions at each remodel or tenant change.
- Assuming improvements in an acquired building are qualified improvement property without confirming who made them and when.
- Using percentages from another store. The IRS guide warns examiners about studies built on industry averages.
How the study fits with your tax adviser's work
The study classifies and documents. Your tax adviser decides how to use the results: whether bonus depreciation, which applies at 100 percent for qualified property acquired after January 19, 2025, or section 179 is used, whether to elect out of bonus by class, how a look-back study is filed through a change in accounting method, how the passive activity rules affect a landlord's losses, and what recapture applies on sale. State conformity varies.
Questions to ask a practitioner
- Will you follow the IRS retail or restaurant matrix, and where will you depart from it and why?
- How will you separate landlord and tenant costs?
- How will you analyze kitchen electrical, plumbing and ventilation?
- How will you identify qualified improvement property and confirm who made it?
- For multiple locations, will you use sampling, and how will it be documented?
- Will the asset list support dispositions at each remodel?
- Who signs the report, and will you support it on examination?
Questions people also ask
Is a restaurant building 39-year property?
Generally yes, as nonresidential real property. Kitchen equipment, hook-ups, signs and site work may have shorter lives, and interior improvements after the building was first placed in service may be qualified improvement property.
Are kitchen equipment hook-ups 5-year property?
The IRS restaurant matrix treats dedicated water, gas, drain and electrical connections to kitchen equipment, and equipment exhaust hoods, as section 1245 property in asset class 57.0. General building systems stay 39-year.
Is a store's signage short-life property?
Trade-name and department signs are commonly 5-year under the retail matrix; for a pylon sign, only the face. The pylon and its foundation are examined separately.
Can a tenant do a cost segregation study?
Yes, on the build-out and equipment the tenant paid for.
Does the IRS accept the matrix classifications?
Examiners are told not to adjust a taxpayer whose positions are consistent with the matrices, but the matrices are not an official pronouncement of law and apply to the general facts of each industry.
Sources
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapters 3, 6.C, 7.A, 7.B and 7.C.
- https://www.irs.gov/publications/p946 — IRS Publication 946 (2025), How To Depreciate Property: Chapter 4; Appendix B, asset classes 00.11, 00.3 and 57.0.
- https://www.law.cornell.edu/cfr/text/26/1.48-1 — 26 C.F.R. §1.48-1(c), tangible personal property.
- https://www.law.cornell.edu/uscode/text/26/168 — 26 U.S.C. §168(e)(3)(E), (e)(6) and (i)(8).
- https://www.law.cornell.edu/uscode/text/26/179 — 26 U.S.C. §179(e), qualified real property.
- https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), bonus depreciation guidance.
- https://www.law.cornell.edu/cfr/text/26/1.168%28i%29-8 — 26 C.F.R. §1.168(i)-8, partial disposition election.
Related reading
- What a cost segregation study does
- Qualified improvement property and cost segregation
- Cost segregation after a renovation: improvements and partial dispositions
- Look-back studies and Form 3115
- How to hire a cost segregation practitioner
To find a practitioner, search the NBCSS directory or browse cost segregation specialists by state.