Expensing restaurant smallwares.

• Author: Ellentuck, Albert B.

Restaurants and taverns can deduct the cost of smallwares in the year in which the smallwares are received and used, instead of having to capitalize those expenditures; see Rev. Proc. 2002-12. The smallwares method applies to businesses engaged in the trade or business of preparing food and beverages to customer order for immediate on-premises or off-premises consumption. In addition to normal restaurants and cafeterias, it applies to caterers, mobile food servers, bars and taverns, and food or beverage services located in grocery stores, hotels and motels, amusement parks, theaters, casinos, country clubs, and similar social or recreational facilities.

However, the method does not apply to the costs of smallwares that are considered start-up expenses under Sec. 195. A business not already engaged in the trade or business of operating a restaurant may not use the smallwares method as justification for expensing the cost of smallwares purchased before opening. These start-up costs must be capitalized under Sec. 195. Assuming the appropriate election is made, up to $5,000 of the start-up costs can be deducted, with the remainder amortized over a period of 180 months, starting with the month in which the active trade or business begins.

Smallwares consist of the following ten categories of items: (1) glassware, (2) flatware, (3) dinnerware, (4) pots and pans, (5) table-top items, (6) bar supplies, (7) food preparation utensils and tools, (8) storage supplies, (9) service supplies, and (10) small appliances that cost $500 or less individually. Smallwares do not include collectibles or other items of significant artistic or intrinsic value, such as flatware or dinnerware made of precious metals and antique vases or fine art for decoration purposes.

Businesses that qualify for the method are allowed to account for smallwares in the same manner as materials and supplies that are not incidental under Kegs. Sec. 1.162-3. This means that the costs are deductible in the year in which they are actually consumed and used in the business. Smallwares are deemed consumed and used when they are received and are available for me. Large purchases of smallwares near year...