Impairment of Long-Lived Assets: GAAP and Tax Treatment

As restaurant operators seek and open locations, things do not always go as planned. For instance, areas where restaurants are operating can become saturated with competition, demographics and target audiences can evolve or management decided they simply no longer want to operate that location and will close it after year-end. Under generally accepted accounting principles (GAAP), these situations require analysis of poor performing stores. However, on your tax return, the results may have a different effect.

Let’s look at an example: Management of Company A has been watching a group of poorly performing stores and decides further analysis is required. GAAP requires that projected future cash flows need to be calculated on these stores. This calculation involves projecting earnings before interest, taxes, depreciation and amortization for each year through the remaining obligated lease term. However, if any of those locations were owned versus leased, then projected future cash…