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New 'smallwares' rules mean big savings for eateries

The IRS recently has announced an important change for restaurants and taverns. Taxpayers will be able to deduct the cost of "smallwares" in the year they are received and available for use. The new rules are effective for tax years ending on or after Dec. 31, 2001.

Restaurants and taverns use many items in the preparation, service and storage of food and beverages. Pots and pans, dishes and glassware are common examples of these items, known as smallwares in the restaurant industry. Generally, an "opening package" of smallwares is purchased before a restaurant or tavern opens its doors to customers. The package typically is purchased as one unit from the same vendor. Replacement items are thereafter purchased on an ongoing basis.

Industry data show that the average cost of an opening package of smallwares ranges from $10,000 to $50,000, and that smallwares have an average useful life of slightly over one year.

There has been uncertainty as to whether the cost of smallware replacements must be capitalized or may be currently deducted. The new procedure allows a current deduction, clears up uncertainties and is easy to administer.

Smallwares Defined

For purposes of this new expensing option, smallwares consist of a surprisingly large group as follows:

  • Glassware and paper or plastic cups;
  • Flatware and plastic utensils;
  • Dinnerware and paper or plastic plates;
  • Pots and pans;
  • Table top items, including items placed on customer tables, such as salt and pepper shakers, ash trays, sugar caddies, tablecloths, menu holders, vases and candleholders;
  • Bar supplies, including mixing glasses, cutting boards, liquor pourers, jiggers, storage bottles, wine and champagne stoppers, bar caddies, wine coolers, decanters, slow pourers and malt shakers;
  • Food preparation utensils and tools, including hand utensils, pastry and grill brushes, skimmers, knives, kitchen shears, strainers, colanders, shakers, measuring cups and spoons, thermometers, gloves, goggles, timers, scales, shaker baskets, salad spinners, lettuce crispers, sifters, mixing bowls, kitchen towels and kitchen staff uniforms;
  • Storage supplies, including food containers, flatware sorters, dish containers and spice racks;
  • Service items, including pepper mills, cheese graters, bread boards, pitchers, coffee pots, storage racks, wait staff and self-serve trays, soup and salad bar trays and containers, bus tubs, tray carts, booster seats, and wait staff uniforms;
  • Small appliances that cost $500 or less, including iced tea dispensers, can openers, condiment pumps, individual food warmers, heat lamps, slicers, glass washers, electric knife sharpeners, blenders, juicers and nonindustrial mixers.

     

    Exception

    The new rules that permit this deduction are available for those taxpayers that already operate one or more restaurants or taverns. They do not apply to the first purchase of smallwares made by a taxpayer. Those initial purchases by a taxpayer must be capitalized.

    The new IRS procedures are a significant benefit to restaurants and taverns. Contact your CPA if you have any questions or think these rules might apply to your business.


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